Financial issues have hardly been out of the headlines in the last five years, ever since the credit crunch first came into the national consciousness, and the European sovereign debt crisis of the last two years has merely served to intensify the media coverage.
Since the autumn of 2009, the European Union has been struggling with the mounting debts of some of its weakest economies, notably Greece and Portugal, as well as Ireland, severely hit by the global downturn. All this has led to mounting fears among investors.
Summit conferences, top level negotiations, make or break meetings and a series of bailouts have so far failed to extract struggling countries from their debt crises or fully restore investor confidence.
The crisis has even raised questions about whether the Euro can survive as a currency, placed strains and risks on banks across the continent and forced cuts in government spending, putting several countries back into recession.
Fears have risen about Italy, Europe’s third largest economy, and Spain. Even France, whose banks hold large amounts of Italian government bonds, was dragged into the mire, leading to credit ratings agency Standard and Poor’s downgrading its rating by one notch at the beginning of the year. Italy and Spain were downgraded two points, and Portugal’s credit reduced to junk status, indicating Europe’s sovereign debt worries were far from over.
It is the risk of contagion from the sovereign debt crisis that has been at the forefront of investors’ minds and held back global markets. While Greece only represents 1% of the eurozone economy, and a minuscule portion of the global economy, it is the risk of the domino effect of contagion that concerns investors should it default and drop out of the Euro. As well as the Greek problem, Europe’s challenge is to stop Italy and Spain ending up like both Greece and Portugal.
So what are the opportunities for investors in what remains a tough and uncertain economic environment? Equity markets so far in 2012 have started on a much more positive note. This could be due to a realisation setting in that there is a political will to resolve the crisis coupled with a strong desire among leaders to keep European Monetary Union (EMU) together.
In recent times, investors have become worried that there is worse to come and that share prices will decline no matter what the industry sector or market share of companies. As a result, they often buy and sell at precisely the wrong time. The fear of missing out pulls investors in when markets are soaring, and causes them to sell when they have already fallen.
Yet there are exciting and attractive investment opportunities out there. Take, for example, large blue-chip companies with a strong and healthy market position and a continuous record of generating profits and earnings during all phases of the economic cycle. Such companies have seen their prices held back along with all others as a result of high-level macro-economic circumstances outside of their control, yet they remain attractive propositions through their proven resilience, ability to ride out the crisis and sustained long term prospects.
Investors should be looking at these cash generative companies, with their strong balance sheets and more predictable profit streams. Some of the best opportunities today can be found in the telecom and pharmaceutical sectors.
And one of the safest places to invest in equity markets in times of economic turmoil are in defensive sectors such as consumer staples – industries that manufacture and sell food and beverages, tobacco and household products. These are typically the last products to be removed from the household budget at times when disposable incomes are being squeezed.
In addition, many analysts see corporate bonds as a promising asset class, with recent sell-offs presenting an attractive entry point for investors. Exaggerated fears of mass defaults are, in the eyes of many, presenting investors with unprecedented value in high quality corporate bonds, which offer much more attractive yields than those provided by gilts.
Commercial property, too, continues to represent a high-yielding and relatively stable asset class, presenting a further valuable opportunity for investors to diversify their assets and ultimately be rewarded over the longer term.
After the events of the past few years, investors need no reminding that equity investing can be volatile. But history is clear - stock markets tend to rise over the longer term, despite short-term fluctuations. Good investment opportunities still exist for the prudent investor, across a diversified portfolio. However, to find those opportunities requires the expertise of a skilled and experienced wealth management specialist in order to satisfy properly medium to long-term investment objectives.
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