Look beyond familiar stockmarkets for reliable returns in rough times

A professional investor tells us where he’d put his money. This week: Giles Parkinson, managing director of global funds at Close Brothers Asset Management.

gold ingots and coins
(Image credit: Getty Images)

The Close Portfolio Conservative, Balanced and Growth fund range seeks to achieve resilient returns over the long term through a company-led approach to investing in a multi-asset context. It acquires “cheap durables”: direct interests in predictable businesses purchased at attractive cash-based valuations that will appreciate and repay their debts.

The current economic backdrop requires a careful application of this long-term approach in the short run. Inflation has reached levels not seen for a generation and central banks responded last year by increasing interest rates.

Today the economy is decelerating, profit margins are being squeezed, and debt is more expensive and less readily available. As a consequence, we expect a recession in America and potentially in other developed markets. This is likely to entail a fall in corporate profits, which would put downward pressure on equities and corporate bonds as the risk of default rises. Fortunately, however, investors have recourse to the cross-asset toolbox.

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A boost from bonds

Developed-market sovereign bonds were one of the worst-performing asset classes last year as the meagre starting yields were insufficient to offset the capital losses associated with higher interest rates. Any income from a bond with a duration of ten years, for example, was swamped by the 30% capital loss associated with a three percentage-point rise in rates. But looking ahead, we expect central banks to cut interest rates once inflation is under control and economies are in recession. Broadly, all sovereign bonds have the potential to reverse their recent losses, but the iShares USD Treasury Bond 20+yr UCITS Exchange Traded Fund GBP Hedged (LSE: IDTG) could be particularly attractive. The long duration adds leverage to changing interest rates: a shift in the base rate has more impact on the price of long-duration paper than on the value of short-duration bonds. And the hedging removes the currency risk of owning overseas bonds for sterling- based investors.

The yellow metal will shine

Gold is priced off the yields on cash and fixed income, which represent the opportunity cost of holding it. Investors will pay a higher amount for gold when cash yields nothing, but less when cash yields something. So as interest rates reverse and decline into a recession the gold price could experience a tailwind. The physical metal or any physically-backed gold exchange-traded commodity should benefit, including the Royal Mint Responsibly Sourced Physical Gold ETC (LSE: RMAU). Equities are also priced off the alternative yields available elsewhere in fixed income, but gold, unlike equities, doesn’t have earnings risk through a recession.

Resilience and reliability

If corporate profits are at risk then it makes sense to skew equity investments towards firms with defensive earnings streams that don’t fluctuate much with the economic cycle as well as possessing an attractive long- term growth outlook. The Swiss-listed multinational branded consumer goods manufacturer Nestlé (Zurich: NESN) could fit this description thanks to ongoing predictable demand for the group’s everyday essentials, while the portfolio has shifted towards categories with higher structural growth rates, such as pet food and confectionery. The stockmarket doesn’t award points for originality.

Nicole García Mérida

Nic studied for a BA in journalism at Cardiff University, and has an MA in magazine journalism from City University. She joined MoneyWeek in 2019.