Investors in bonds should tread carefully in 2011, warns John Chatfeild-Roberts, Chief Investment Officer at Jupiter Asset Management.

Chatfeild-Roberts says that while bonds have attracted significant asset flows from investors this year, income investors face some difficult choices in 2011 as interest rates are likely to remain low and the potential for bonds to produce further gains looks limited. Chatfeild-Roberts says: "It has been another strong year for bond investors but the risks associated with holding these assets are increasing. Government debt looks particularly vulnerable with the yield on US Treasuries blowing out from 2.51% to 3.28% last week on the back of a new stimulus package aimed at boosting US growth and better economic data. This has come on the back of sharp rises in yields this year for debt-ridden eurozone countries such as Greece, Ireland, Portugal and Spain and investors should expect volatility to continue into 2011.

"Investment grade corporate bonds are also looking less attractive. While companies are generally in pretty good shape, their bonds are vulnerable to increases in government bond yields. Opportunities remain further down the credit rating spectrum but investors need to be very selective and focus on protecting against downside risk.

"Yields on equities look more attractive in many cases and while equity income funds have underperformed growth funds for some time, they may prove a better option for investors seeking income than all but the most flexible of bond funds.
 
"I am not as pessimistic on the outlook for growth in the UK as some. While the UK economy faces significant headwinds as the government imposes spending cuts, there are some encouraging signs of growth; the manufacturing sector, for example, expanded at its fastest pace for 16 years in November. Furthermore, companies are, in many cases, extremely profitable and so profits growth may be better than many expect. I am also more positive on the US and while growth across the pond will not be of emerging market proportions, it should be adequate."

Emerging markets are likely to continue attracting asset flows in 2011. Chatfeild-Roberts says: "There is no doubt many emerging markets have lower debts and higher growth rates than the western world and are assuming a greater role on the world stage. This transition will provide some excellent investment opportunities. As economies develop, there will be increased demands for the building blocks of that development, such as raw materials. Furthermore, the emergence of billions of new consumers has the potential to benefit well financed companies with desirable western brands and powerful distribution. However, the transition for emerging markets will not always be a smooth ride. How these countries manage their growth, especially in the face of so much liquidity looking for a home, is as important as the way in which the West tackles its structural deficiencies."

Investors also need to be alive to potential consequences of a 'new world order' in currencies emerging. Chatfeild-Roberts said: "There is a real global issue with emerging markets that peg their currencies to the dollar as it prevents the natural rebalancing that would otherwise take place. It is entirely possible that for some countries the dollar peg will break down, leading to an appreciation of their currencies against the dollar. This would result in more expensive imports for the West, but give greater purchasing power to consumers in those countries.  It would also be beneficial in currency translation terms for Western investors in emerging markets.
 
Chatfeild-Roberts remains positive on the outlook for gold while interest rates remain low. He says: "The opportunity cost of holding gold is not high while interest rates remain low and with the world outlook remaining relatively uncertain, I continue to believe it makes sense maintaining exposure to the asset class."

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Notes to Editors

Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM) are both authorised and regulated by the Financial Services Authority 25 North Colonnade, Canary Wharf, London E14 5HS. JAM and JUTM's registered address is 1 Grosvenor Place, London SW1X 7JJ. The group is collectively known as "Jupiter". The above commentary represents the views of the Fund Manager at the time of preparation and may be subject to change. They are not necessarily those of Jupiter as a group and readers should be aware that they should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.