Quality rules in a melange of dross

Rewards await stockpickers who take an active stance and seek exposure to promising asset classes through quality companies with international reach, especially in developing markets.

John Chatfeild-Roberts is the chief investment officer at Jupiter Asset Management

In America, which went into the downturn first, costs have been slashed more quickly than in other western countries and earnings recoveries have been stronger. While a raft of austerity measures in Europe could affect some American multi-nationals through their European operations, these may be offset by some resilience in American consumer demand and a degree of emerging market growth. Despite the disappointing American data (weaker retail sales, for example), the country is set to grow between 3% and 3.5% this year, according to the Federal Reserve.

Growth in China, meanwhile, is forecast at 11% this year, but measures introduced to cool the country’s overheating property market could weaken this trend. Moreover, China’s pool of labour is shrinking as a result of its one-child policy and therefore becoming more expensive. To maintain its growth levels, China will need to increase productivity and move up the value chain. This could have implications for inflation in the West and make a repeat of the disinflation of the past decade unlikely, even if some manufacturing moves to cheaper countries like Vietnam.

Given this potential for inflation and the fragile state of paper currencies overshadowed by national debts, holding a certain amount of cautious assets such as gold offers investors a good insurance policy.

But uncertainty also creates opportunity. Some asset classes are looking good value, particularly quality companies with strong balance sheets and the ability to grow despite difficulties facing the global economy. Many of these are trading on attractive valuations. Over the next few years, investors should expect to see continued high levels of volatility. A simple, sensible and active approach should be rewarded.