Five ways to guard against eurozone contagion
The eurozone crisis shows no sign of a convincing resolution any time soon, with Spain the latest country to ask for help from European policymakers and experts split over whether Greece will leave the single currency bloc.
In light of the increased uncertainty, here's how to protect your portfolio from possible eurozone contagion.
Diversification is key. Portfolios should have a wide range of assets with characteristics that perform differently in a range of market conditions, including infrastructure, commodities, real estate and emerging market debt.
"By combining assets in an appropriate manner investors can reduce risk and enhance returns. Now is not a time for investors to place all of their eggs in one basket,' says Alex Letchfield, chief investment officer in the UK wealth division at HSBC Asset Management.
When growth opportunities are stunted, defensive income stocks in the consumer staples and pharmaceuticals sectors can be a good place to shelter your capital. Plus, there's the added bonus of a good stream of income.
Michael Hewson, market analyst at CMC Markets, believes these type of companies - such as AstraZeneca, Johnson & Johnson and British American Tobacco - with a global exposure 'look set to be the favoured destination for investors'.
Bonds are the success story of the crisis, with gilt funds returning 15 per cent on average over the past year.
However, yields are at historically low levels. High-quality corporate bonds from global companies can be much better capitalised than a government, and typically offer inflation-beating yields.
Ian Spreadbury, fixed income portfolio manager at Fidelity Worldwide Investment, has been focusing on investment-grade corporate bonds, with a preference for consumer staples, transport, telecoms and utilities.
"Currently, investment-grade corporate bonds yield more than double the average gilt - around 4% - and this attractive additional yield is supported by reasonably strong credit fundamentals," he says.
If you don't fancy the stockmarkets, keep money in deposit-based accounts, but be mindful of the Financial Services Compensation Scheme limit of £85,000 per person per banking institution. Although in practice larger amounts have been refunded, it is sensible to spread money around banking groups to keep safely under the limit.
However, when the market is at historic lows, don't rule out the opportunity to pick up some good-quality companies at bargain-basement prices.
Thomas Becket, chief investment officer at PSigma Investment Management, believes some European exposure could benefit a portfolio, but advises focusing on high-quality companies or "global funds that have the opportunity to select European stocks at the right time".
He says: "The global growth of European companies' earnings has not been rewarded because they are domiciled in Europe. When the volatility subsides, as it surely will at some point, then there will be fantastic opportunities for us to take advantage of."
This article was written for our sister website Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).