Fixed-income portfolio specialist Jeff Brown and global equity manager Todd James recently traveled the country addressing a number of issues, including questions surrounding the tumultuous global market, in a series of live client events. Their presentation was titled “Uncertain World, Uncommon Opportunities: Successfully Navigating Today’s Ever-Changing Financial Markets.” Here are some highlights of what they discussed:

Jeff Brown

Although 10-year Treasury bond yields have been stuck in a downward trend after recovering from the 2008 financial crisis, Capital Group Private Client Services fixed-income portfolio specialist Jeff Brown told the crowd he believes bonds will remain an important component of a well-rounded portfolio.

Low bond yields are a result of the flight to safety spurred by a market that has been ensnared by concerns over how the Eurozone will emerge from its sovereign debt crisis. Yields have additionally been hit by political logjams in Washington, D.C. Nagging fears about a potential double-dip recession in the U.S. have also contributed to the tenuous environment. 

Despite the uncertain macroeconomic backdrop, bonds have largely performed as expected: preserving capital, generating income and helping to offset equity volatility. Although Federal Reserve Chairman Ben Bernanke has indicated that interest rates will remain low at least until mid-2013, the increased complexity of the market and the elevated influence of macroeconomic events on the investment environment mean that yields are constantly changing. Therefore active bond management is essential, and research-intensive credit analysis helps protect against current volatility.

Jeff noted that managers of our taxable portfolios have gradually returned to investing in mortgage-backed securities and increased exposure in client portfolios to corporate bonds–particularly those of high-quality industrials. Managers have also begun to pull back from Treasuries because of the significant rally since August.

In municipal portfolios, managers are placing more of an emphasis on revenue bonds and pursuing wide geographic and sector diversification. They are also limiting interest rate exposure given the current environment.

Todd James

The stock market has been particularly frustrating for investors, as changing macroeconomic headlines about global growth prospects and ongoing troubles in the Eurozone trigger exaggerated daily price swings in stocks with fervent regularity. Given the intense volatility, studies show investors are taking an increasingly shortsighted view, holding stocks for about nine months, compared with a previous average of about eight years.

Despite this volatility, Capital Group Private Client Services equity portfolio manager Todd James told audiences it’s critical to maintain a global perspective, especially because world markets are more closely linked than ever.

Todd identified several factors that strengthen the case for equities. The first is demographics: The world’s population continues to grow at a fast pace, and more millionaires are expected to emerge from developing economies. Reputable consumer brands are likely to see added demand thanks to the increased spending power of emerging markets consumers. Corporate earnings are also bound to continue to rise as many companies put their balance sheets in order and streamlined their cost structures during the credit crisis. At the same time, valuations have yet to recover and remain attractive based on multiple measures. 

Todd pointed to several themes at work in client portfolios. Certain industrials are poised for stronger growth because higher labor costs are fueling orders for machines that can replace human workers. In financials, several global firms are well positioned to capitalize on regions of the world where banking is still underdeveloped. Last, energy consumption continues to soar, boding well for certain oil services companies likely to benefit from the need to dig deeper to discover new sources of production.

The next round of live client events will begin in the spring. For additional details or an invitation to attend, just contact your Investment Counselor. n