In the context of today’s uncertain market backdrop, could the environment still be favourable for investing in shares? We believe so, if investors adopt three core principles: portfolio diversification, careful selection and long-term thinking.

Yes, inflation (the rate at which the price of goods and services rise), will remain higher for longer. Yes, central banks will likely continue to pursue their aggressive monetary policies. And yes, financial assets are likely to fluctuate in an environment unsettled by numerous external influences – not least the war in Ukraine and the ongoing energy crisis in Europe.

But should you really dismiss the share markets? Should you really just hope for better times or the right moment? We don’t think you have to – as long as you apply some core principles: be selective, diversify your portfolio and invest for the long term.

In selecting stocks, we avoid relying on false trends or investing in a sector as a whole, however promising it may seem.

The last earnings season (a period in which corporations release their quarterly earnings reports) confirmed that performance levels can vary widely from one stock to another, even within the same industry. You need to take a close look at factors such as each firm’s level of debt, the quality of its management and its entire operational environment, which includes energy efficiency and environmental responsibility.

The example of technology

Take technology, for example. Given current valuations, we believe there are opportunities in this area, but you need to be selective. We are wary of firms that are exposed to weakening demand from end consumers. We prefer companies involved in cloud computing and data centres – areas that are holding up well despite the prevailing market backdrop. Even the energy sector, which might look like a safe investment in today’s context, is not immune to unexpected changes, for example windfall taxes, that may impact the attractiveness of investments.

You need to be selective

At a country level, we’re finding opportunities across markets including some compelling ones in Japan, where corporate reform is driving opportunities, and the monetary policy-driven foreign currency backdrop may be closer to finding a stable ground compared to the recent past. But our approach is bottom up. We are finding distinctive opportunities on a stock by stock basis.

The same is true for the UK. While we are cautious on the wider economic situation in the UK, some of the large cap (a company with a market capitalisation value of more than $10bn) equities are currently offering particularly good value and the silver lining is the large revenue exposure to international markets where a weaker sterling boosts revenues when converted back into local currency.

Remain diversified

We don’t think this is an environment for broad strokes investing. However, this is a market that has the potential to offer good returns for active investors. As mentioned though, selectivity is key, as is the need to diversify risk across a portfolio of investments – ie not having all your eggs in one basket.

There are a range of investment strategies, and a wide variety of approaches and broad range of investment propositions to allow investors to stay diversified. Some management teams adopt value approaches, ie investments they believe to be undervalued by the market and thus can be bought for a lower price than their perceived worth. Others manage growth strategies – investing in companies that are expected to grow at an above-average rate compared to their industry or the broader market – and others style agnostic strategies. We also have strategies designed to deliver financial returns alongside a real-world environmental and/or social outcome.

Focus on the long term

Last, and importantly, we avoid investing in hypes. We favour companies with strong and resilient fundamentals and long-term themes: those we believe will be able to thrive independent of market turbulence. That includes renewables in the broadest sense, so also including suppliers as well as firms that use low-carbon technologies to improve their energy efficiency. Another key area is infrastructure, where many company revenue streams are linked to the rate of inflation and also offer shareholders higher and growing dividends, which can help protect investors from the rising costs of capital.

While we can’t predict where the next crisis could come from, nor when it will come, what we can say is that the three-pronged approach of selectivity, diversification and long-term focus should help investors navigate the market volatility and will create portfolios with good return potential.

Fabiana Fedeli is chief investment officer, equities and multi-asset, at M&G Investments

Charity Finance wishes to thank M&G for its support with this feature