Forget the dollar and gold, here are the real safe havens
Contemplating eurozone disintegration, renewed hostilities in Korea and an anti-inflationary clampdown in China, investors' default reaction has been a time-honoured retreat into the perceived safe havens of the dollar, Treasuries and gold. I'm not sure this makes much sense.
Increasing exposure to the liabilities and currency of a debt-burdened economy flirting with deflation and a metal with little utility and less yield seems like an odd response to extreme market stress. Faced with the probability of heightened volatility, I would rather protect myself with the factor that all real investments have in common – a reliable income.
Over the long haul, the most important element of an investor's total return is the re-investment of this income. Capital appreciation comes and goes but the steady compounding of dividends, coupons and rental income is what really makes the difference. Arguably it is the difference between real investment and speculation.
One of the curiosities of today's markets is the fact that despite interest rates being at historic lows in many countries, there is no shortage of income if you know where to look for it. I've found it in three places – one you'll most likely be familiar with, one you probably gave up on a few years ago and one you may have never considered.
The familiar source of income is right under the noses of investors in the UK and right across Europe – the shares of blue-chip companies. I recently compared the dividend yields of some of the biggest, most reliable companies and was surprised to see that their shares currently offer investors an income of 2pc, 3pc, even 5pc more than the 10-year bonds of their own governments.
What do Telefonica, National Grid, Total, GlaxoSmithkline and telecommunications company KPN all have in common? They all yield considerably more than the medium-term debt of their respective governments. In each case the gap between the two income streams is wider than the average over the past three years, too. There has never been a better time to invest in high-yielding equities.
This matters for two reasons. First, because in a low interest rate environment many investors are desperately searching for income. If a big, reliable company, often running a utility or quasi-utility in a safe democracy, will pay you such a decent income it seems churlish to turn your back on it these days.
Second, there is plenty of evidence that investing in high-yielding stocks is a proven way to secure better capital performance, too. All around the world, the top fifth of high dividend payers has been shown to out-perform the market as a whole.
Another high-yielding area of the market is one that you may have been rather over-exposed to as the financial crisis hit in 2007 and consequently may have not given much thought to since – commercial property.
During the real estate boom in the middle of the decade, rising property prices pushed yields lower and lower until they offered an income worth just 0.8pc more on average in Europe than those government securities. When you consider that back then people had faith in governments repaying their debts, that was a minuscule premium to compensate for the higher risk of default. Today, investors earn on average 3.8pc more than on a government bond, a higher spread than at any point in the past 10 years.
As with high-yielding equities, the search for income is likely to see more and more capital chasing these higher returns, which should in turn underpin the prices of the best assets. Like equities, too, commercial property offers investors a degree of protection against inflation. Three of the four property bull markets since the Second World War have been driven by inflation and only the most recent one by credit expansion.
A third area in which investors might reasonably look for income is one which a comparison of risk and historic return suggests might be the most interesting of all – emerging market government debt. A better performer in capital terms since 1993 than any of US equities, emerging market equities, commodities and property, emerging market debt continues to offer a big income advantage over perceived havens like US Treasuries.
When you consider that emerging market growth is set to outstrip developed markets for years to come, that the last significant default in this area was Argentina in 2001 and that many so-called developed government bonds look like they are heading for junk status, the argument against emerging market debt gets harder and harder to make.
Perhaps equity income, commercial property and emerging market debt will turn out to be the real safe havens.
Tom Stevenson is an investment director at Fidelity Investment Managers. The views expressed are his own.