Ashok Shah of London & Capital looks at the types of asset classes and products which make sense given today’s economic situation and outlook.
Date: Apr 2012
With income investing, this means the full spectrum of fixed income and equities – and for investors who can tolerate illiquidity – real estate continues to look interesting for core properties where occupancy rates are likely to remain high, he explained.
According to Shah, now isn’t the time to hold a large amount of cash, with the asset markets underpinned by the actions of the central banks around the world in terms of the liquidity being injected into the marketplace.
In the very short term, he said markets might appear technically to be over-extended, leading to short-term corrections, but then markets will begin to climb because underlying fundamentals seem sound for 2012.
Where to generate income
Within equities, Shah said investors should focus on companies with strong balance sheets – which means debt-to-equity of less than 50%. This will divert attention away from companies with high leverage – which is a hindrance in low-growth environments.
Such filters typically lead to global multi-nationals as an interesting category for investing in the current environment – especially if these companies have large and expanding businesses in emerging economics.
Most of these companies have good governance and management systems, said Shah, with diversified businesses by geography.
And in many cases, many of these companies have credit ratings which are stronger than the underlying ratings of the governments in the countries they are operating.
In the fixed income space, Shah said there is huge opportunity – ranging from investment-grade instruments which tend to be quite defensive but have fairly good income flows available, to the better-quality high yield, especially given that corporate cashflows are still expanding, with balance sheets continuing to improve in a number of countries around the world.
Emerging markets in favour
A key area of interest, said Shah, has been in emerging market bonds, both in terms of large corporations as well as governments. This is due to the strength of the balance sheets in these continues and their disciplined budget deficits.
In terms of sub-categories, he said bonds denominated in hard currencies are attractive because this can remove the volatility which comes from the local currencies. This provides lower-risk exposure to emerging markets.
In essence, said Shah, exposure to emerging market local currency bonds is good for medium- to long-term investing, plus the running yields remain attractive in range of countries around the world.
In addition, bonds issued by multi-national agencies such as the Asian Development Bank are also interesting, he added, because the credit quality is high. These therefore play to the long-term currency appreciation potential in emerging market economies, so are good building blocks for a portfolio.