Three quality stocks to beat market volatility

Each week, a professional investor tells MoneyWeek where they'd put their money now. This week: James Gardner, fund manager, Signature (part of Rowan Dartington & Co).

Much of the loss of investor confidence in recent weeks can be attributed to the impotence of politicians, both in the eurozone and the United States. A lack of decisiveness in tackling sovereign-debt issues has resulted in extreme risk-aversion. This has manifested itself in exceptional volatility for global equity markets. Prices for safe havens, such as core' government bonds and gold, have made a succession of record highs. This flight to safety has also seen record amounts move into money-market funds.

Policymakers have, at times, attempted to restore confidence. The European Central Bank intervened in European government bond markets, a number of eurozone members imposed a 15-day, short-selling ban, and the US Federal Reserve committed to low interest rates for two years. Yet the probability of prompt and decisive action is low. The eurozone's members are struggling to align their agendas, while in the US, the presidential election is now taking centre stage. So stockmarkets are likely to remain turbulent until either economic data improves or more decisive action is taken.

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Yet despite all these headwinds, a declining oil price, an expectation that central banks will lend additional support (in the form of low interest rates and perhaps more quantitative easing), and the fact that companies are sitting on piles of cash, all offer some respite for battered investors. In this challenging environment, we aim to identify investments that can grow regardless of the current turbulence. Although we expect volatility to continue, good-quality companies with decent dividends and healthy balance sheets look particularly attractive. Here are three firms that fit the bill.

My first pick is GlaxoSmithKline (LSE: GSK), a pharmaceutical company with a global duopoly in vaccines and a fast-growing global consumer business. Even in a tough trading climate, its strong cash flow will support earnings growth, dividend growth and its share buy-back programme.

My second pick is Pennon (LSE: PNN), the British water and waste management business. The water business can increase prices by the retail price index plus 1.9% until 2015. With an expanding waste-management business, the firm's directors have committed to growing the dividend by 4% above inflation until 2015. The shares should therefore provide real income increases, along with the potential for some capital growth.

My third and final pick is Golden Prospect (LSE: GPM). This firm is a specialist investment company, focused on investing in higher-risk gold and other precious metals explorers and producers. The safe-haven' status of gold has been supportive, and if the current period of risk aversion continues, its investment portfolio should remain in favour. Of more interest though is the disconnect between the gold price and gold equities, which have in the past been positively geared to a rising gold price. Gold equities are currently trading at a substantial discount, so should a recovery in global equity markets materialise (and provided the gold price remains strong), we would see the perfect environment for this investment company. High precious metals prices should also ensure that mergers and acquisitions in the sector remains a strong possibility.