Long-term investors should ignore the market volatility of recent months and look for high-dividend, cash-rich companies, Ashok Shah, chief investment officer of London & Capital, told CNBC Monday.
Analysts have warned that the market swings seen during the summer as the euro zone debt crisis unfolded could continue into next year.
The VIX index, which measures volatility, after hovering around 20 for much of 2011, shot up to almost 50 in August, and is still close to 30.
The prevalence of high-frequency trading makes more "momentum plays" and makes swings in the marketplace more violent, according to Shah.
"When it gets depressed, it gets to panic stations," he said. "The good old behavior patterns don't apply any more."
"The correlation between risk assets has been very high. They go up and down together, and there's very little discrimination within quality among these high dividend plays or risk plays," he added.
"What we need to get back to is fundamentals, fundamentals, fundamentals."
The global economy is set for a period of slowing growth, according to IMF forecasts. As returns on capital appreciation in stocks are closely correlated with world output, stocks could be less attractive to investors.
During the volatility, many fund managers have raised their exposure to low-yielding bonds, but most have limits on how much of their portfolio can be invested in fixed income and cash.
Multinationals Look Defensive
There are still some attractive investments out there despite volatility, Shah believes.
"There are a lot of global multinationals who have been neglected and are beginning to look very, very attractive indeed," he said.
"At this moment, when things are very volatile, they look quite defensive. You are able to buy global multinationals at no premium at all."
High-dividend yields are crucial at the moment, he added.
"We are in a world of zero interest rates, and anybody who can cross the 2-3 percent threshold starts to look very effective," he said. "Paying a high dividend is just part of it – free cash flow is much more important."
He believes that 6-7 percent is a good threshold for free cash flow when investing in a company.
"Within a high dividend environment, we are looking for lower leverage and also looking at revenues," he said.
"Look at the balance sheets of individual companies that you are going to be backing and look at revenue, and make sure you're very, very comfortable with their strength."
As many companies have cut down on their overheads, including making job cuts, and shied away from mergers and acquisitions, their profit margins have actually risen despite the crisis.
"A lot of long-term drivers have been increasingly positive for the last few months," said Shah.
"Profit margins are getting to that stage in the process where they can't expand any more, and wages as a percentage of GDP haven't really gone up. Over the next five years, it will move the other way and profit margins will come down."
"Cost-cutting in terms of downsizing of the labor force has probably reached its extreme right now," he added. "Ultimately, strong companies have a lot of cash because they haven't done capital investment."