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Fixed expression

With serious questions hanging over the economic health of the US and a number of eurozone countries, one thing is certain we live in uncertain times.

What is clear is that in an environment of excessive debt levels and falling asset prices, it has for some time looked increasingly difficult for world leaders to navigate a course to avoid a new financial crisis centred on the US and Europe.

While the risks to the global financial system are growing, the options open to policy-makers to address them have become fewer. Many leaders are no longer able to fall back on increased government spending or substantial cuts in interest rates to address a new crisis.

It would be foolhardy to try to predict how the current situation will play out in the weeks and months ahead. But in itself the uncertainty has served to underline the importance of fixed-interest investments in a properly diversified portfolio.

At a time when equity markets are highly volatile and interest rates in large parts of the developed world look likely to remain low for a long time, the fixed interest paid by bonds together with the possibility of long-term capital growth is of clear value to investors.

To my mind, the most attractive opportunities at the moment are to be found among investment grade corporate bonds, which offer higher yields and in many cases lower risk than sovereign debt.

In very general terms, corporate bonds from companies in the US, the UK and the stronger European economies are offering yields of 4 per cent to 5 per cent, which, again speaking very generally, compares with average yields of about 2.5 per cent for government bonds from the same nations.

In testing economic times, it seems prudent to focus on players in defensive sectors such as utilities, telecoms and tobacco, where cashflows are likely to remain steady. Good examples are companies such as International Power, United Utilities, GE, AT&T and British American Tobacco.

In the sphere of sovereign debt, the downgrade of the US government’s credit rating is evidence that the risk map is changing before our eyes. Heavily indebted as they are, developed countries can no longer be automatically judged safer than faster growing emerging market nations, where debt levels are far lower. In that context, sovereign debt in emerging market economies is becoming increasingly attractive, with opportunities to be found in countries ranging from Brazil to Korea.

Forward currency purchases can make a significant contribution to a fund’s returns and the currencies of countries with decent long-term growth prospects such as Norway, Canada and Singapore continue to provide opportunities. The Swiss franc and the Brazilian real have both done well over recent months and, despite action by their governments to restrain appreciation, both retain their appeal.

The issues facing the world economy will not be resolved overnight. The levels of debt burdening many Western economies have taken a long time to build up and correcting these imbalances will take years. In that context, fixed-interest securities continue to represent an important element in an investors’ portfolio and the flexibility of a global approach will be more valuable than ever.

Geoff Hitchin is manager of the Marlborough global bond fund


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