This year, like last, presents investors with an array of risks. Europe seemingly creates new financial and economic concerns daily, while, in the United States, fiscal questions and election uncertainties trouble the outlook. Still more dangerous issues surround the military and diplomatic maneuvering in the Persian Gulf. And these are just a sample of the sources of investment concern. But even as all this prompts people to hide in cash and the usual safe havens, such as U.S. treasury bonds, these investment choices pay such poor yields that presumed safety comes at tremendous cost. Investors, then, must consider riskier investments.

Among those choices, credit-sensitive fixed-income instruments would seem to offer superior returns with reasonable security. Among equity choices, opportunities also present themselves. Among developed markets, North America seems to offer the best risk-reward balance. Though stock valuations are better in Europe and Japan, the one still needs to deal with its debt crisis and the likelihood of recession, while the other faces the very fundamental matter of severely aging demographics as well as the immediate adverse impact of an expensive currency. Emerging markets, though, offer a reasonably bright outlook. Though they are not likely to generate anything near their former growth and return records, they still promise much more impressive rates of expansion than the developed world, which, given rather attractive valuations in these emerging markets, promises much improved equity returns. Here, then, is a brief analysis of the situation in each area and the associated investment prospects.

The Safe Havens Look Risky
The turmoil and uncertainty that have plagued markets since 2008 has driven many individual and institutional investors into the usual safe havens. Yields on U.S. treasury bonds — the quintessential hiding place in uncertain times — have accordingly fallen to record lows, as have German and other favored government yields. Gold prices, though uneven of late, have soared. Meanwhile, the Federal Reserve's monetary ease has driven down all short-term dollar-based rates to fractions of a percent, as has the Bank of England to sterling-based rates. The Bank of Japan did the same to yen-based short rates a while ago. The European Central Bank (ECB) had bucked the trend, but the demands of the sovereign debt crisis have forced a reversal of that policy so that more recently Eurozone short rate targets have fallen as well.

Matters have gone so far that these havens now offer ridiculously low returns. Recently, German government yields actually dipped into negative territory. Investors, in other words, paid Berlin for the privilege of lending it money. Ten-year treasury bonds in the United States, with yields below 2%, still pay a positive nominal return, but after accounting for even modest rates of inflation, they leave investors with a real loss, effectively paying the U.S. Treasury in real terms for the privilege of lending it money. Short rates, in all seemingly safe developed markets, whether on government debt or deposits, remain so low that any funds left in them lose in real terms with each passing day.

Offered such low returns, investors seem likely to look for better deals elsewhere with the slightest improvement in economic or financial conditions. Even a modest abatement in the pattern of European panic, for instance, or an improvement in the U.S. economy or even signs of stability in the emerging economies, could draw funds out of government bonds, raise their yields and impose capital losses on their holders, as well as on those in gold. Easing tensions in the Middle East (and such a thing is possible) could have a similar effect. Meanwhile, it is hard to see what would cause these safe-haven yields to move much lower. Investments in these areas, then, look generally unattractive, offering a continuation of inadequate yields at best or capital losses on the least improvement anywhere.

In such a situation, it would seem better to lean toward lesser-quality more credit-sensitive fixed-income instruments. These carry yields much higher than most government bonds and other seemingly safe investments. In the event that matters remain as worrisome, they should at least offer a positive real return. And, in the event that there is the slightest improvement on any front, they should protect against the capital losses likely in U.S. treasury and other stronger government bonds, even if they do not necessarily promise capital gains. Of course, not all lesser credits are equal. Bonds issued by Europe's endangered periphery may require more intestinal fortitude than most investors want to exhibit.

But in the United States, for instance, high-yield bonds offer yields some 700 to 800 basis points above treasuries, a gap 300 basis points above their long-term averages. Intermediate-grade corporate issues offer similarly attractive, if less dramatic, yield spreads. Since default experiences have actually improved, the picture is one of an attractive risk-reward tradeoff. For many U.S. tax payers, municipal bonds, even after their very good 2011 performance, offer an even more attractive investment picture for much the same reasons.