With growing concerns over European sovereign debt and a faltering US economy, how should I reposition my portfolio?

Greece’s is effectively broke. Greece’s public debt is hurtling towards 160% of gross domestic product, combine this with a deeply uncompetitive economy and there is not a scintilla of doubt in my mind that Greece’s bondholders will be forced to take substantial haircuts (a default). This could potentially trigger another financial crisis and force Ireland and Portugal to follow suit in restructuring their debt mountains. The crisis could then begin to snowball which is why European leaders are so keen to avoid a greek default, European officials would prefer to kick the cliché further down the road.

With the growing likelihood of a Greek default and an increasingly fragile global recovery, I would recommend increasing exposure to high quality defensive companies. These are businesses which provide essential goods and services such as medicine, food and utilities etc. These will be resilient to economic setbacks and are characterised by having robust balance sheets and strong cash flows. Defensive stocks can deliver stable earnings regardless of the where the economy is on the business cycle. I would recommend investing in an equity income funds, one I particular like is Invesco Perpetual High Income fund managed by Neil Woodford who is one of the best known and best performing fund managers in the UK. Alternatively you could invest in globally diversified companies with solid cash flows such as GlaxoSmithkline and Vodafone.

With the backdrop of a sovereign debt crisis and uncertainty in the Middle East, gold is certainly worth a look. Although I wouldn’t invest in gold myself because its an irrational investment, whose value is in the eyes of the beholder. I do believe there is greater number of fools willing to pay a higher price for this metal and so envisage higher prices for the foreseeable future. It still remains the principle hedge against economic crisis, potentially higher inflation and government’s persistent attempts to devalue their currencies. I believe the best method of exposure is through an investment vehicle which specialises in mining stocks, an example mentioned in an earlier article is the Black Rock Gold and General Fund. Alternatively investing in ETFs backed by the physical metal is another effective way to mimic the price of gold.


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