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Gold-barsWhich allocations will protect investors in these troubled times? George Mitton examines the outlook for key asset classes­.

In the two weeks after Standard & Poor’s downgraded the US credit rating on 5 August, the gold price rose 10% to exceed $1,800 (e1,260) an ounce for the first time – a clear sign that investors were losing faith in the stock and bond markets and casting around for safe havens to store their money. The same impulse has prompted huge appreciation of the Swiss franc.

A flight to safety is an almost inevitable consequence of a financial disturbance, whether it is caused by fears of stalling growth, a sovereign debt crisis or both. But aside from ploughing money into gold bullion, what else can investors do to protect themselves?

According to the fund managers interviewed in the following pages, quite a lot. For although the current conditions are challenging, the outlook for some asset classes is positive.

Just take equities. Despite the large losses seen on all major stock indexes in the past month, fund managers such as Tristan Hanson, Ashburton’s head of asset allocation, think there is still money to be made. He says: “For those with courage and a medium to long-term horizon, equities present the best opportunity.”

Of course, not just any equity will do. Managers should seek the comparative safety of big, established firms with – crucially – low debt levels. A well-diversified portfolio of several such companies based in different geographical regions will perform better than most assets in the next few years, says Hanson.

Simon Brazier, head of UK equities at Threadneedle, agrees the emphasis should be on financially strong companies that will “thrive even in a lower GDP world”. He says there are many such firms on the market and even believes the current climate is favourable for investors with chutzpah and a willingness to bide their time.

“The aggressive sell-off of the past few weeks may well prove a compelling buying opportunity for those with longer-term investment horizons,” he says.

However, investors hoping to scoop up bargains should be aware that managers and institutional buyers alike have learned from the experience of 2008. Our article on equities examines the phenomenon of institutional investors increasing their allocation to equities amid the falling markets, no doubt inspired by the actions of a courageous few who made millions buying low-priced stocks in the post-Lehman tumult.

There are opportunities in bonds, too, though they won’t be found in the usual places. A flight to safety has compressed yields on US treasuries to paltry levels and the Eurozone is enduring an ongoing debt crisis, meaning most sovereign bonds are unattractive. John Stopford, co-head of fixed income at Investec, says the answer may lie in corporate debt.

“Bonds issued by large multinational businesses in defensive industries are starting to look a safer medium-term bet than many major sovereigns,” he says.

Another attractive asset class is local currency debt. Australia, Norway, Switzerland and Sweden are thought to be safe investments because these countries “avoided the worst of household sector leverage or have strong export sectors”, says Stopford.

Among non-traditional asset classes, commodities may be an appealing choice. One fund manager interviewed in our commodities article (pp32-33) says pension schemes should consider increasing their allocation to this asset class as high as 15%. The bet is that supply shortages of industrial metals and agricultural commodities will continue to push up prices.

This may also be a good time to increase allocations to emerging markets. Although equities in these markets will be volatile in the short term, many managers expect strong fundamentals and low debt levels to produce faster growth in these countries than in the developed world. Another promising asset class is emerging market debt.

There is plenty of space to increase exposure to these assets. According to Marcus Svedberg, chief economist at East Capital, emerging markets represent half the world economy and three-quarters of economic growth but just a quarter of sovereign debt and a mere 13% of the broad global equity index.

©2011 funds europe