Chatfeild-Roberts: Global brands offer best defence

Traditional safe haven asset classes, such as government bonds, offer neither safety nor value; global brands are the most attractive means of weathering economic turmoil, writes John Chatfeild-Roberts of Jupiter Asset Management

Equity and bond markets remain as treacherous at the start of 2012 as they were in 2011. The eurozone crisis rumbles on despite mounting pressure for a resolution and, consequently, perceived risk-and-reward relationships have been turned on their head.

Traditional safe-haven asset classes, such as government bonds, have performed well as risk-averse investors try to hide from economic uncertainty. However, many of these investments may not be as safe as they seem and, when the potential returns are analysed, certainly cannot be viewed as good value.

Although economic data from the US has continued to show signs of improvement, the levels of yield available on US Treasuries offer little upside, and no protection against price inflation. The story is the similar for UK gilts: all maturities of less than 10 years are yielding less than 2%.

With consumer price index inflation running at 4.2% (in December 2011), holding gilts seems difficult to justify given they are backed by a country with high debts and weak growth prospects. The woes of the eurozone could take a heavy toll on world growth and, if there is a recession on the continent, the UK is unlikely to be immune.

Corporate attraction

Received opinion suggests that cash and government bonds are at the low end of the risk/reward spectrum, while equities offer higher potential returns but only if the risk of greater volatility and risk are accepted. Investors are now coming to terms with an environment where this relationship is faltering.

For example, much of the corporate world does not have the same balance sheet problem as governments, while their bonds typically offer higher yields. Although the macro picture seems bleak, company valuations in certain areas look attractive.

Equities in Western markets appear reasonably valued, especially for companies that fit the global titans theme: those with global brands and the ability to expand their businesses. These companies typically have healthy balance sheets, strong cash flows and the potential for decent dividend growth, thus enabling investors to remain patient should equity markets stay volatile.

Measured approach

A conclusion to the current situation will take time, and markets will almost certainly pre-empt any resolution before it materialises. Citing the catalyst for a rebound in confidence is always easy after the event, but identifying it in advance is not easy.

We prefer to hold assets that seem attractively valued and that have the potential to meet or exceed investors’ expectations over the medium to long term. Share prices, as ever, may continue to be volatile in the short term, but healthy multi-national stocks paying good dividends may be a more comfortable bet than investing in the supposed safe haven of certain countries’ debt, or for that matter the deposit accounts of most European banks.