Private investors are bracing themselves for extreme market turbulence, as they reduce their stock market exposure to the lowest level since December 2008. 

According to data from Lloyds TSB, two thirds of private investors are expecting severe market turbulence. The average stock market investment held by a private investor has now dropped by £4,000 to £24,000 in the past year.

The bi-annual Investor Outlook report by Lloyds TSB Private Banking suggests a double dip could be likely as although the FTSE 250 is now higher than at the end of 2008, private investors are investing less and the number of investors that think the market has far from recovered has increased to 64 per cent, from 56 per cent in July 2009, and 58 per cent six months ago.

Ash Misra, head of investment policy at Lloyds TSB Private Banking, explains that negative news reports, including euro stability and the BP oil spill, have contributed to a lack of confidence in the stock market.

‘Many investors are acting on fears by selling stocks and reducing their exposure to market turbulence. This is by no means a fire sale, but it is clear evidence that they are reacting to worsening market conditions by taking a more cautious approach,’ Misra adds.

However, the report says investors are generally still confident of the long-term performance of the stock market, although they are confused about what to invest their money in. Of the investors that expressed confidence in the stock market, 40 per cent said they think it will outperform cash or bonds and Misra believes this is ‘perhaps due to current low interest rates and sovereign debt fears’.

However, predictions of the economic outlook vary massively across the investment industry. Saunderson House, a wealth management firm that at the beginning of the year described the challenges facing the government and monetary authorities as ‘walking a tightrope’, now has a more positive outlook. It thinks deflation and a double-dip recession remain unlikely due to several powerful stabilisers put in place by the new government and banks.

Nicholas Fletcher, chief executive at Saunderson House, explains: ‘Inflation-protecting assets, such as property and equities, are far more attractively valued than their deflation counterparts: government bonds and cash.’ He advises that ‘portfolios should contain a healthy allocation to these “risk assets”, with diversification achieved through corporate bonds rather than gilts or other sovereign debt'.

Richard Woolnough, manager of the M&G Optimal Income Fund, sums up the contrasting views about future economic stability: ‘It has been three years since the credit crunch began, and arguments that this is not a normal economic cycle are becoming more compelling. If this is the case, it will be a long-term growth environment that the Western world governments, central bankers, and fund managers have never seen before in their working lives. A challenge indeed.’