Although the FTSE has not closed below the 5,000 mark since early July 2010, once again during trading today it fell below this keenly watched barrier and there are more worrying signs ahead.

Market stats tell the story

The volatility of the FTSE is proving hard to follow, let alone anticipate. With recent examples of 5% losses in less than a week and 4% losses in a single day, you might be forgiven for thinking the index of the 100 most highly capitalised UK companies is more volatile than you first thought.

But perhaps it is unfair to judge over such short periods? Well actually the picture is similar even if we look beyond the last few weeks. During the last quarter the FTSE fell almost 14% amounting to the worst quarterly drop since 2002 – sizeable falls and bigger than those seen during the banking crisis in the third quarter of 2008.

Even taking a slightly longer view – on the first trading day of 2011 the FTSE closed at 6013.9 and on the last trading day of September closed at 5128.5. This equates to a loss of 14.7% revealing the harsh reality that volatility is here to stay.

Which way now?

The FTSE has hovered within the 5,000 to 6,000 range for the last two years with it looking like steaming ahead neither one way or the other, perhaps until now. With the likelihood that Greece will be unable to meet critical deficit-reduction targets the outlook remains extremely downbeat.

Although it seems the idea of a “big bang” solution to Europe’s problems has been discounted as unrealistic, it still means we are back to the slow and painful process of incremental steps towards meeting the challenges of a Greek debt restructuring. A bleak outlook indeed.

Continued volatility

Not only do we have a large exposure to Europe in terms of lending but there is also a sizeable reliance on exports which are so critical in fuelling our economic recovery. Unfortunately, the market remains unsure of the impact of the Eurozone situation in the UK but what is certain is that there is no pain free route out of this crisis and the market knows it.

As things stand though, although we are skirting close to a recession, we’re more likely to face continued stagnation than a double dip. However, the combined economic pressures on the UK are perhaps more powerful than any in recent years and the above performance figures are a constant reminder of how quickly things can change. This should be a word of caution to the unwary investor.

What does this mean for your investment options?

Since it no longer feels like the market is going to forge ahead in the short term, and with cash offering little or no upside, especially after inflation and tax, the landscape continues to provide investors with a headache.

However, there is one type of product which can work well in the current state of economic disarray and this is the structured product. These replace the woes and emotional turmoil associated with direct market exposure with defined risk and return. This results in a wide variety of ways of accessing the market, depending on whether you consider it will go up, down or stay flat.

Oliver Roylance-Smith, head of savings and investments said, “One such product that can benefit from the current market conditions is the kick out plan. Many provide the potential for a fixed return each year, provided the FTSE finishes higher than it starts. This means that even if the FTSE has risen by 1% you could receive double digit returns – this is particularly attractive when there is market uncertainty and I expect to see the returns from these products rise even further in the current climate.”

This is a solid example of where a product can fit with your view of where the market will go. Even if you feel the market will only rise a little or perhaps fall in value, structured products provide an interesting and often compelling solution.

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The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors.

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