Favoured Investment Opportunities

Recently in advice to a client on investment of cash I briefly surveyed a variety of my current favoured ideas and other options. I thought my comments would form the basis for a blog post, so here goes.
1. Cash
This can be retained for risk reduction purposes. Cash is suitable for very cautious investors who are more interested in the return of capital rather than return on capital. However cash is also excellent for tactical re-investment into equities at a later stage, if there is a stockmarket crash. Last autumn with the EuroZone back in crisis and clear systemic risk I feared a major meltdown in equities. A variety of sticking plaster actions from the authorities have arguably treated the symptoms not the underlying causes  – government indebtedness, unemployment and poor economic growth is deep rooted. Elsewhere China’s ecomony faces a potential hard landing and the US a “fiscal cliff” of pending tax rises and reductions in government spending.
A crash may not occur but if it does it could knock equities back a long way similar to the banking crisis of 2008 and subsequent recession, and therefore provide excellent buying opportunities. In March 2009 the FTSE 100 fell to a low of 3,519 well below the closing value of 5,793 on 10/9/12. In contrast the risk of risk reduction i.e. in holding onto cash is if the crash does not happen and markets rally; buying into equities at a later stage then becomes more expensive. Further holding cash is a poor medium term investment – interest rates are low and are set to remain low and your capital is eroded by inflation in terms of its real purchasing power.
2. European Equities
Europe offers good long term recovery potential and should benefit from the recent decision of the ECB* to buy unlimited Spanish and Italian bonds. This will drive down yields and the costs of borrowing although as noted above it does not deal with the underlying EuroZone problems.. Despite the issues with the EuroZone, Europe is home to some excellent companies with global franchises and strong balance sheets. Exposure should be through an actively managed stockpicking fund rather than an passive ETF or index tracker. A good manager can weed out the basket cases for example financial stocks with exposure to EuroZone debt and the toxic Spanish property market.
3. IMA** Global Funds
This sector provides broad and diversified global equity exposure which can form a long term core element to a portfolio. A fund manager may asset allocate to favoured regions, although top down stockpickers may consider the domicile of a company to be largely unimportant. 
4. Global Equity Income
I am very positive about global equity income for long term investment, either for income and income growth or pure capital growth. We all know the importance of re-invested dividends. With large amounts of cash on company balance sheets, some will be returned to shareholders and the outlook for this sector is good although a slowing global economy may put pressure on the sustainability of dividend growth further down the road. Given this I favour funds with a focus on high quality companies rather than yield.
5. American Smaller Companies
These are my above average risk pick. I retain my positive view on America and this sector which has slightly underperformed the broader market in the last 12 months has strong growth potential especially as US consumer confidence picks up. The US smaller companies’ market is large, diverse and comparatively liquid. It includes relatively large capitalisations and established franchises. So we are not principally talking about micro caps and start ups. Smaller companies tend to be be more nimble, innovative and dynamic compared to large caps and during recovery and growth phases they typically outperform. During recessions however they underperform.
6. Absolute Return/Multi-Asset
These lower risk funds are arguably a better alternative than cash. There are prospects for capital protection but this is not guaranteed. There is also the potential for cash plus returns. Although there are target returns there are no guarantees of outperformance of cash nor guarantees of absolute returns.
7.  Gold
Here I refer to investment through an ETC (Exchange Traded Commodity). Gold is traditionally considered a good hedge against inflation and is inversely correlated to the US dollar. Prospects of further QE***in the USA is considered a positive reason to invest in gold as QE should weaken the greenback
Gold is also traditionally viewed as a safe haven and a store of value. However prices can be volatile and although the spot price is about $200 per ounce off the September 2011 highs, gold has had a long strong rally over the last 10 years. Some commentators predict the price of gold will go much higher; others are more bearish and consider it vulnerable. I am currently neutral about gold but reckon it could be suitable for many portfolios, but only as a minor holding.  
8. Commodities
These have been covered in a previous blog on 11/7/12. Along with emerging markets and technology these higher risk sectors are favourites of mine as long term holds, for regular savings and for tactical investment from cash – the latter two strategies can benefit from volatility.
Please note these investment options carry different risk profiles and may not be suitable for you. Independent financial advice should therefore be sought.
* ECB is the European Central Bank.
**IMA is the Investment Management Association, who group funds with similar investment mandates into sectors. This enables meaningful comparisons between funds.
*** QE is Quantative Easing or money printing. It is designed to stimulate the economy through increasing the money supply and involves buying governments bonds from banks and other institutions. This drives down the costs of government borrowing but I am not convinced money is getting through to the real economy.
Mike Grant