What a dismal time to be an investor!

There are times in financial markets when protecting capital is more important than looking for gains. There are many reasons to believe that this is one of those periods, and that the downside of investing considerably outweighs the upside.

For a start, all global asset classes moved to higher valuation levels in the first few months of the year with equities at multi-year highs. We know that booms do not last forever, particularly at stretched valuation levels.

Secondly the inexorably upward trend of US interest rates and inflation is obviously not supportive for asset price levels that reflect previously ultra-low interest rates. A correction is a matter of when and not if.

Thirdly, the bursting of the Great Arabian stock market bubble has given regional investors considerable reason to believe that what goes up also has to come down. And if stock market crashes can happen while the Middle East is basking in high oil prices, can any other market be safe?

Global correction?

Surely the logical conclusion is that the global financial markets will undergo a significant correction. Indeed, London's FTSE last week gave up all its 2006 gains, and Asian stocks have weakened significantly.

This could be the start of a two phase re-valuation of assets to reflect higher global interest rates. We will probably see more weakness in markets before a summer lull, and then instead of an autumn recovery, there might be the traditional October sell-off.

Interestingly commodity prices have not been immune from the turmoil in global markets over the past week, and could well also undergo a substantial correction. However, if the commodity bull market analysts are right, this is just a buying opportunity.

What is less certain is how far a setback in global equities would prove to be a buying opportunity. For valuation levels in most markets are on the high side, and only a really steep correction would produce valuations that made shares cheap on long-term market averages.

Cash is king?

Perhaps then a one-year timed cash deposit account is the best option. US dollar investors will have to gamble that the greenback does not devalue much further, and it could well be that mayhem in financial markets leaves the dollar stronger rather than weaker, as a sell-off would increase the demand for cash.

Gold is a harder call to make as the yellow metal is a safe haven in a financial crisis like the US dollar, and thus out performance against other asset classes looks likely and any weakness should be short-term.