Threadneedle June Investment Strategy

Sarah Arkle, Threadneedle Chief Investment Officer, comments: With inflation concerns rising, it seems unlikely that government bond yields can return to the lows seen earlier this year. Investment grade corporate bonds have seen a marked narrowing of yield spreads over government securities. However, this has been accompanied by a deluge of new issuance, which has come at cheaper spreads to those in the secondary market. Within high yield, we have used the recent sharp spread tightening to improve the quality of our holdings. Corporate stress is spreading and we expect to see earnings expectations weaken as the year unfolds. Elsewhere, emerging market debt performed solidly last month. Booming commodity prices are boosting export revenues for several emerging economies, most notably Brazil and Russia which are both large oil exporters.

Equities

The UK is traditionally viewed as a defensive market and we remain overweight, but less so. We continue to favour the oil and mining sectors where the current strength of commodity prices is supportive and companies are enjoying earnings upgrades. However, we remain cautious of financial and consumer stocks which are seeing downward earnings revisions. Overall, businesses with high debt levels continue to perform poorly.

We retain our positive stance towards Asia. Interest rates in several countries have been rising for some time. However, while there are increasing pressures on Asian central banks to tighten monetary policy, they may prefer to tolerate a higher rate of inflation rather than attempt to dampen demand through higher interest rates. Moreover, many countries are using fiscal policy, in the form of subsidies, to cushion the impact of rising food and energy prices.

The Japanese market has enjoyed a significant rally from the lows seen in mid-March. There has been some reassessment of the market by international investors against the backdrop of the deteriorating fundamentals for leading western economies. The Japanese economy is continuing to benefit from exports to emerging markets such as China, the Middle East and Russia.

With European equities trading at 12.9 x 2008 earnings, current valuations do not look challenging. However, higher oil and food prices are likely to increase the pressure on consumer incomes, with a dampening effect on economic activity and corporate earnings. Nevertheless, many European companies remain optimistic, particularly those benefiting from capital spending in emerging economies.

We remain underweight in US equities as valuations continue to look more expensive than for other global markets and offer less scope for expansion. Overall, we continue to believe that aggregate earnings growth forecasts are too high and that downgrades will be seen in the coming months.

Within Latin America, corporate profits remain robust, 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 to 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.