Twenty years ago last month the world’s stock markets suffered their largest ever one-day percentage declines on a date now styled Black Monday. The plunge came just days after the Great Storm, in which 18 people were killed and more than £2 billion worth of damage was caused, and seemed to sum up the mood of the time.

It is hardly surprising, therefore, that in the run up to this joint anniversary, stock markets seemed rather jittery. And investors went to bed on the eve of the anniversary rather worried about a late slump on Wall Street the previous trading day.

But in the event, the FTSE 100 index closed just 1.1%, or 68.6 points, lower at 6459.3 on October 19. Byron Coombs, Director, Wealth Investment Management at Coutts, explains: “Clearly what happened 20 years ago bears little or no relevance to today. The issues that affected the market then are just not factors today.”

Indeed, stock markets today operate within a benign economic environment, with low inflation, positive economic growth and moderate interest rates. Furthermore, the credibility of the world’s central banks, regulatory and taxation systems are strong. “There is a better economic backdrop than 20 years ago,” explains Coombs. “We still have an economic cycle, but it is much softer than before.”

Coombs believes the recent volatility in the UK stock market is a function of rising interest rates and slowing economic growth, and will probably remain a characteristic of the marketplace for the coming months. This will provide some buying opportunities.

“Assets are well priced today. Share valuations are a little stretched at the moment, not by much, but I do expect that the UK market will remain volatile,” he explains.

Coombs believes a more attractive investment opportunity exists in emerging markets. “They are a bit overbought in the short term and there is greater volatility but there are also better long term growth opportunities,” he explains. “But the fact is that emerging markets will generate better returns over the long term.”

Coombs believes that all stock market investments should be long term, by which he means at least five years but probably more than eight. “That will be a period of healthy expansion in the emerging markets, with greater productivity and efficiency gains,” he explains. All these factors should contribute to stronger stock markets.

“There is a better economic backdrop than 20 years ago. We still have an economic cycle, but it is much softer than before."

When looking for investment opportunities, Coombs considers several factors including the economic growth rate; the sustainability and viability of public accounts, such as current accounts and public sector deficits; and the resilience of a country’s accounting and legal system.

For example, some emerging markets still have confusing legislation regarding the ownership of assets while red tape may also exist which make its difficult for foreign shareholders to buy, and conversely, sell shares.

China is a market that Coombs likes over the longer term. It has vast emerging urban and middle classes who are changing the fundamental structure of the economy. “The legal and accounting system is improving and the government’s finances are strong,” he says. “Plus there is a strong and resilient economy underpinning it all.” The benchmark Shanghai Index has more than doubled in value already this year.

But Coombs is “hesitant” to recommend individual markets or stocks. “We construct client portfolios to meet an overarching objective – each market and asset class is chosen to be compatible with the portfolio as a whole,” he says.

It is also wise to diversify investments to ensure that there is not too much dependence on one type of asset class or market place. And while emerging markets have the potential for higher gains long term, they also carry greater risks. This means it is unwise for an investor to place a significant portion of a portfolio in emerging markets, unless they have a high appetite for risk.

An illustration of this advice in action can be seen in the Coutts Wealth Generation portfolio. It has an investment horizon in excess of eight years, and used the stock market turmoil of August and September to buy shares for the long-term and build up its tactical exposure to markets it favours, such as emerging ones.

Consequently, the Wealth Generation portfolio reduced its exposure to the UK market by 2% and split the proceeds between Pacific Rim equities and emerging markets. This brings the combined total exposure to these markets to 10%, against 46.3% for UK equities.

It may seem a small exposure to such dynamic markets but even that percentage could significantly boost returns if the stock markets dramatically rise. It is also important not to risk everything on one bet, like a gambler at Las Vegas staking everything on the number seven. As the name implies, the fund also aims to generate a client’s wealth, which is why investing almost half its proceeds in a major – and historically more stable – market is so important. That number seven, after all, can sometimes not appear.

By Helen Dunne