THE Jekyll and Hyde nature of investors has been in full evidence over the past six weeks and the song they have sung has changed from “Don’t Worry – Be Happy” to “Tragedy”, with a more measured “We Can Work It Out” being the current refrain.

This is very much more in tune with the reality of global economic prospects over the coming year. Without wishing to extend this light-hearted simile too far, however, the operative word in the last song title is “can” not “will”. In essence, a realistic appreciation of the risks facing us has been restored, without the risks themselves being removed from the equation.

So what has changed fundamentally over the period? Most obviously, markets lost patience with European political dithering in the face of the Sovereign debt crisis, which in turn finally prompted a credible response to the problems.

However, practical implementation of the plan has yet to fully occur and comes at the price of substantial budgetary retrenchment across the Euro Zone. In short, the net effect of a more secure supply of liquidity offset by tighter fiscal conditions is unknown – but impending moves to reduce public expenditures while growth remains fragile has prompted adherents to the Keynesian economic orthodoxy to ring the alarm bells.

Looking forward, having apparently stepped back from the brink, the tone of investment markets over the coming months is likely to be set by two factors.

Firstly, close attention will continue to be paid to European Sovereign debt spreads. So far, there is still little evidence that debt investors’ nerves have been soothed to any significant degree and they require convincing of the political will to address the problems. Otherwise the (previously) unthinkable question of the very future of the Euro will return to centre stage.

Secondly, we will all be searching for evidence that recent volatility has not meaningfully slowed economic momentum outside Europe. The key variable to watch in this regard is employment growth in America. The logic here is that if the recovery in the world’s largest economy running the most aggressively stimulatory policies with the most traditionally gung-ho consumers is faltering, we should all be concerned.

We are certainly in a better position today than at the beginning of May, but the unavoidable truth is that we are currently trying to judge not just the investment “weather”, but the consequences of movements in the tectonic plates of both economics and politics. Even if we are correct on the first, we can be overwhelmed by a mistake in the second. It is, after all, little comfort if the sun is shining when an earthquake hits.

As a consequence, our investment policy will retain a high degree of diversification. We are attempting both to identify those areas that offer the cheapest “insurance” against an adverse outcome while at the same time looking for the cheapest “leverage” to an improving picture.