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 per cent – and this attractive additional yield is supported by reasonably strong credit fundamentals,’ he says.
  • If you don’t fancy the stock markets, 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.’

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