World stock markets endured a torrid time last week amid growing speculation that Greece may depart from the euro.
There are fears that a messy Greek exit from the single currency, dubbed a Grexit, will create a crisis that would quickly engulf weak euro-zone economies, such as Spain, Ireland, Portugal and Italy. The fear is that, if Greece fully and formally defaults on its sovereign debt, investors will stop investing in sovereign bonds from the other countries, making it impossible for them to roll over their national debt as old bonds come up for repayment.
Banks, particularly French banks, that lent heavily to southern Europe would have to write off their investments, making them vulnerable.
Stage two of such a disaster scenario would see countries dropping out, or getting kicked out, of the euro currency, creating volatility in currency markets and gyrating values for any euro-denominated asset.
The potential disaster scenario is serious, with many possible negative effects for the local investor. With that in mind, we asked five financial planners to devise a portfolio that would protect investors from the worst effects of such a crisis.
Rick Adkinson, managing director of Private Capital
Even if the European situation is somehow quickly resolved, investors will be worried about a growth slowdown in China, US political gridlock or Japanese stagnation. 'The so-called Great Recession will be with us for a while,' says Adkinson.
He advises investors to be mainly in cash.
Adkinson personally remains invested in Pimco Total Return Fund and Templeton Global Total Return Fund, which are bond funds with track records of steady returns.
He sees the possibility of a 20 per cent rally in global share markets if the euro zone finds a quick solution to the Greek problem. But, he cautions: 'I would not like to put a figure on the downside should the situation continue, or worsen.'
Michael Roberts, of HSF Asset Management
Roberts says he manages clients' portfolios in the same way he manages his own. He says he holds about 35 per cent of his portfolio in high-dividend stocks, of diversified businesses across critical sectors, such as food, energy, resources and technology.
He says he is now accumulating shares in Emerson Electric, a conglomerate; SAP, a business software firm; miner BHP Billiton; and consumer conglomerate Colgate-Palmolive. He likes all these firms for their size, stability and - most of all - consistent profitability.
Another 35 per cent of his portfolio is in high-grade, high-yielding government bonds, such as Australian government bonds, and corporate bonds, including ANZ Bank convertible preference shares.
'Finally, I have 30 per cent in cash waiting for the buying opportunities that will occur as the crisis worsens, fear takes hold and investors sell valuable assets at low prices - probably to me and my clients,' says Roberts.
Kevin Liem, chief investment officer of TTG (Hong Kong)
Liem recommends a balanced portfolio that consists of one-third US dollar-denominated bonds (he also likes the Pimco Total Return Bond Fund), one-third in equities funds focused on conservative stocks that are cheap on a fundamentals basis, and one-third in 'market neutral' investments that are relatively insulated from the swings of the wider market.
He likes US-dollar bonds because he expects they will offer protection to investors should the euro currency collapse. The assets are also less volatile and risky than commodities or equities.
That said, he is comfortable with equities funds that take a value approach to investing. In other words, they buy shares in conservatively run firms, with strong balance sheets, that are underpriced by the market.
Market neutral funds are designed to retain their value even during mass market sell-offs.
Otherwise, Liem advises people to hold US dollar-denominated assets and to avoid commodities, including gold. He says that a large crisis would spark a rush into US treasuries, pushing up their value but pushing down the price of almost everything else.
Robert Flux, director of Simmonds (International) Financial Associates
Flux says he has been recommending that clients stay clear of the euro in favour of other major currencies for several years. 'It's doubtful this current round of concerns about Greece will be the last for the euro zone,' says Flux.
He advises that, during this period of uncertainty, it's best to invest in 'absolute-return' multi-asset managers. Those funds seek to produce a set level of return, and not just beat a benchmark such as the Hang Seng Index. Multi-asset funds hold a mix of investment classes, such as bonds and equities.
Flux points to the BNY Mellon Global Real Return Fund as a good example of such a fund.
'Anyone anticipating the worst should ask: 'Where is it best not to be if this scenario plays out?' If I asked myself that question, one of the last places I'd want to be if things got really ugly is in major index trackers, low though their fees may be,' says Flux.
Peter Kende, chairman of Financial Partners
Kende advises clients to put 70 per cent of their assets into a balanced fund with a three- or five-year investment horizon.
Understandably, he advises against European sovereign bonds and bank stocks. He does like equities in firms with a global reach, high dividends and strong cash flow that are buying back their own stock.
'I would also buy investment grade debt preferably in Asia with its appreciating currencies. Britain is also looking better than the euro zone, although the equity market is telling us otherwise,' says Kende.