Where best to invest in this winter of worry

With widespread uncertainty affecting global markets, investors can no longer put their trust in once-reliable openings. But there are still astute choices to be made.

Turkish lira-denominated debt is among the most favourable investment bets in the coming months.

Amid the turmoil, where should people invest? There has been much discussion over the past six months about the merits of various asset classes that provide deflation protection.

During the first half of the year we favoured stocks, then our recommendations evolved to favour both stocks and bonds together to benefit from the corporate growth globally and hedge against any shocks within the volatile market.

Moving forward towards the end of the year, our views on asset allocation shifted as the global cycle evolved. We currently favour bonds and suggest that investors include a large allocation to long-term government bonds in their asset mix.

We remain sceptical and concerned that the developed economies' weakness will linger, government bond yields will fall further, and the emerging economies will continue to be the principal wellspring of attractive risk-adjusted returns.

In the US, the Federal Reserve has announced a second bout of quantitative easing, but its effects should be limited and we still expect a "growth recession" there.

In Europe, growth should slow soon as fiscal tightening and a stronger euro start to bite.

Asia will continue to expand, but global imbalances are unlikely to be solved quickly, despite some progress made on the international scene.

Even though we continue to foresee a "winter of worry" with uncertainties likely to dominate, there is still a bright light at the end of the tunnel.

As part of the allocation to fixed income, and with an eye on emerging markets that are granting noticeable opportunities, we have set a number of tactical recommendations for investors.

These include investment in high-quality Turkish lira-denominated debt as well as buying Korean, Chinese and Taiwanese equities.

The rationale behind the recommendation to invest in Turkish debt lies in a combination of high yields that are available together with the overview on the currency's limited downside risk over the next year, with further support from strong domestic economic growth and external factors.

Currently, the yield on two-year Turkish lira denominated sovereign debt is more than 7.5 per cent, while "AAA"-rated Turkish lira-denominated debt of the same maturity issued by supranationals is yielding more than 7 per cent.

Even though Turkey is running a relatively large current account deficit (about 4 per cent of GDP), recent data shows that capital inflows have exceeded the current account deficit every month since April.

Barclays Wealth expects the lira to maintain its value over the next year, allowing investors to earn a significant carry.

Strong domestic economic growth will also continue to underpin positive investor sentiment towards the currency, as will external factors.

In addition, Turkish residents have a significant stock of savings in foreign currencies, which they accumulated over the two decades of hyper-inflation that ended in 2003.

Since the central bank adopted an inflation-targeting regime, Turkish residents have taken advantage of periods of currency weakness to repatriate their savings.

These flows have reduced volatility and lessen the probability of a sharp sell-off in the currency.

Currency interventions and taxes on foreign investment have become increasingly commonplace in the emerging world, and Turkey is no exception.

The Turkish central bank has regularly intervened in currency markets to slow the appreciation of the lira.

However, the moderate size of Turkey's interventions thus far suggests that policymakers are not particularly worried about the competitiveness of the currency.

Currency strength may also be tolerated on the grounds that it will help to bring inflation down. Reduced political uncertainty should also continue to support consumer and business confidence.

The success of the recent constitutional referendum should increase confidence in the policy agenda of the justice and development party (better known as the AKP) and could therefore indirectly reduce the risk of a significant fiscal deterioration.

Inflation in Turkey warrants ongoing monitoring, as does the current account financing. But we at Barclays Wealth feel that the relatively high interest rates currently available there more than adequately compensate investors for these risks.

Highlighting the second component of our investment recommendations, relative valuations make a convincing case to favour north Asian equities over south and South East Asian equities.

Extending this approach to other indicators and to the wider emerging markets leads us to the same conclusion - on a broad range of indicators that include valuations, earnings momentum, monetary policy and growth expectations, north Asian equity markets score higher than the largest emerging markets in other regions.

Korea and Taiwan, on average, have relatively inexpensive valuations and a higher pace of earnings momentum than their peers in Asia and in other regions.

Meanwhile, China onshore A-shares are trading close to one standard deviation below their historic mean price-earnings ratio; this is why we currently recommend expanding our investment idea that was introduced in June and focused on buying Korean equities, to also include China and Taiwan equities.

In pursuing this investment recommendation, investors need to take into consideration three risks.

First, Chinese property prices represent a policy risk; house prices that continue to surge could create fears of much tighter government policy than is currently priced in.

Second is the outlook for the global technology sector; Taiwan in particular is susceptible to a deterioration in this.

Finally, the pace of the global recovery; ultimately Korea and Taiwan in particular are cyclically sensitive markets, so a worse-than-expected outcome on global growth might not be positive for these markets.

Nevertheless, we think that Chinese, Korean and Taiwanese equities represent one of the most attractive "recovery bets" an investor can make.

Khurram Jafree is head of investment advisory MENA at Barclays Wealth.