Whatever your view on the market there are tools to take advantage

RECESSION or recovery? Deflation or inflation? New bull market or dead-cat bounce? These are the issues which have dominated investors&rsquo; attention throughout the first nine months of the year. Equities have plunged and rallied, yields on government bonds have blown out and contracted sharply, while commodity prices have soared and sterling and the dollar have seen attempted summer rallies fizzle out badly.<br /><br />This wild volatility has created great trading opportunities. Between 1 January and 30 September, copper soared 112 per cent from $2,902 to $6,136 a tonne while Russia&rsquo;s RTS equity index rallied 99 per cent to 1,255 having started 2009 at 632. Meanwhile silver tore up by 53 per cent to $16.45 an ounce from $10.79 on 1 January. The macroeconomic picture may have looked black, but savvy punters who spotted these trades would now be anything but gloomy.<br /><br />All three of these trades played the themes of economic recovery, the prospect of inflation and the return of market appetite for risk &ndash; in direct contradiction to the doom-laden consensus which prevailed in March, when the twin threats of deflation and recession seemed to lurk around every corner. Getting the big picture right &ndash; and playing that inflation trade and going against the deflationary consensus &ndash; was key to putting on those successful trades.<br /><br />After the rally in equities, commodities and bonds seen since March, and the renewed grinding decline of sterling and the dollar, investors now have to ask themselves what they think will happen next. Swingeing interest rate cuts, quantitative easing programmes and fiscal stimulus packages around the world have staved off a prolonged recession, and it appears central banks are prepared to risk inflation as the lesser of the two evils relative to a debt-smothered deflationary spiral.<br /><br />If the authorities succeed &ndash; and interest rates are kept sustainably low for some time &ndash; it is worth continuing to play the inflation trade. Historic market trends have shown that during periods of inflation, such as the 1960s and 1980s, the most suitable investments have been equities, property, index-linked debt and also commodities, such as oil and crops. Precious metals including silver and platinum and industrial metals like aluminium, copper and zinc have also done very well.<br /><br /><strong>CHEAP MONEY</strong><br />The inflation trade should prove even more effective should money be kept too cheap for too long, and new bubbles develop to match those seen in technology stocks in the 1990s and US property this decade. Should global governments and central bankers fail to prop up the economy and inject inflation to erode the value of the globe&rsquo;s still considerable debts, stocks and commodities will probably stumble again as investors embrace the safety of cash and bonds.<br /><br />There is a risk that policymakers withdraw the fiscal and monetary stimulus packages too quickly and deflation can&rsquo;t be completely ruled out. During periods of deflation, such as in the US, UK and Europe in the 1930s and Japan in the 1990s, cash and bonds are the place to be. Falling prices increase the real value of cash in the bank and government bonds.<br /><br />The worst of both worlds, stagflation, where there is little growth but rampant inflation, points to gold and silver. Gold tends to be a haven investment when fiat currencies are seen at risk of devaluation. Certain equity sectors, such as consumer staples &ndash; where demand is all but guaranteed &ndash; also do well if history is any guide.<br /><br />Investors have to decide whether they expect inflation or deflation. Once you have decided, an investment portfolio strategy will shape itself, although you need to careful. Commodity players will know that while sugar and palm oil are up this year, wheat and lean hogs have plunged. Equity investors will have needed Russian and Indian exposure to maximise profits, given the relatively pedestrian returns from the US and UK stock markets.<br /><br />But the good news is that it has never been easier for investors to get involved across all asset classes. New trading tools, improved online platforms and development of instruments such as covered warrants and exchange-traded commodities all facilitate your trading. Then you can put your assessment of the market to the test and hopefully reap rich rewards.<br /><br />Russ Mould is editor of Shares magazine and will take part in the panel discussion Where to Stash Your Cash at 2:15-3:15 on Saturday 31 October at The World MoneyShow.<br />