Threadneedle May investment strategy

Sarah Arkle, Threadneedle Chief Investment Officer comments: Government bond markets in the US and UK should continue to benefit from the constructive backdrop of slowing economic growth and lower interest rates. Amongst the leading government markets, we continue to prefer the prospects for gilts. Within the credit markets, the bad news that was priced into the market a month ago was extreme, with implied default rates unrealistically high. Since then, credit spreads have tightened dramatically led by financials, which we continue to favour over corporates. Although bid/offer spreads have started to come in, we are continuing to focus on attractive new issues. At some point, we believe emerging market bonds will start to react to the lower growth outlook as opposed to the current inflationary pressures, and essentially follow what is happening in developed bond markets. Emerging market bonds should then start to post significant gains. At the end of the month, Moodys upgraded Brazil to investment grade, reinforcing the more positive picture.

Equities

We remain overweight in the UK, which is traditionally seen as a defensive market. The current strength of commodity prices is supportive, as by market cap over a quarter of the FTSE All-Share comprises oil and mining companies. By global standards, the market is attractively valued in terms of its P/E and dividend yield.

The risk/reward profile of Asian markets is now more attractive than at the start of the year and we maintain our positive stance on the region.

We feel that the relative attractiveness of Asia's economic fundamentals will come back into the focus in the second half of the year.

Japan's economy seems to be showing some resilience, helped by exports to emerging markets such as China, the Middle East and Russia. However, there have been concerns surrounding the political situation and the continued lack of shareholder activism in Japan. We are currently forecasting a 1% fall in Japanese earnings for the year to March 2009.

European economies face less of a headwind from consumer debt and extended house prices than the US or UK. However, the strength of the euro will restrain the growth of export earnings. Overall, we continue to expect corporate earnings to be flat in Europe this year.

We remain underweight in the UK equities as valuations continue to look more expensive than for other global markets and offer less scope for expansion. In addition, the economic risks in the US are greater than elsewhere. That said, we have been encouraged by the swift action by the authorities to stimulate growth through monetary, fiscal and regulatory measures.

Within Latin America, corporate profits remain strong and we are currently forecasting earnings growth of almost 20% for 2008, buoyed by the positive outlook for commodity producers. Latin America is also continuing to enjoy healthy domestic consumption and investment.

Property

We remain underweight in property. The health of credit markets, reflected in the availability of debt, will be a significant factor for investor demand in 2008, and hence returns. Occupational markets remain in reasonable health and income returns are looking attractive compared with other investment media. Consequently, a bottoming out of values appears close. The only caveat to this would be that, as a result of a slowing economy, a significant weakening in tenant demand could cause further declines in capital values in 2008.