Threadneedle July Investment Strategy

Sarah Arkle, Threadneedle Chief Investment Officer comments: Bonds - The recent performance of government bonds has been poor amid growing concerns over mounting inflationary pressures, particularly from rising energy prices. However, the index-linked market has been supported by weak economic growth, inflation fears and a lack of relative supply. In general, we favour government bonds at the longer end of the yield curve, as we see them as less vulnerable to setbacks from the challenging inflationary environment. We remain underweight in Europe versus the US, as eurozone bonds are likely to underperform the US under the direction of a more hawkish ECB. We have adopted more defensive positions in our gilt portfolios in anticipation of higher yields. Investment grade corporate bonds look attractive from a valuation perspective but the deluge of supply has been undermining returns. After a period of very good performance, the high yield market gave up some of its gains as investors continued to be concerned by weakening economic conditions which hint at higher default rates in due course. Overall, the fundamentals for emerging market bonds continue to look attractive. However, careful geographical selection remains key and whilst we favour the prospects for Russia and Brazil we are cautious on South Africa and Turkey.

Equities

We remain overweight in equities but less so than earlier this year, given the more challenging backdrop of rising inflationary expectations, declining earnings forecasts and the recent increase in share issuance. However looking further out, we anticipate that inflationary pressures will gradually ease. Moreover, equity valuations, supported by good dividend yields and low payout ratios, continue to look attractive in a historical context.

The UK is considered a defensive market and we remain overweight. We retain a positive bias towards oil and mining companies, which are benefiting from strong commodity prices, and remain cautious of financial and consumer related stocks, which are seeing downward earnings revisions.

The food and energy inflation scare that has hit Asian markets has diverted attention away from the long-term bull case for the region, namely the structural growth in the number of middle class consumers. Equity valuations are undemanding by historical standards and we would highlight the strength of corporate balance sheets and lack of leverage in Asia.

At current levels, European equity valuations do not look challenging. However, markets could struggle through the summer months as earnings downgrades come through.

The Japanese market is beginning to look more interesting as the country's long deflationary period is coming to an end.

US equity valuations look more expensive than for other global markets and offer less scope for expansion.

Overall, corporate profits remain robust in Latin America, buoyed by the positive outlook for commodity producers. However, the Mexican economy is slowing as a direct result of the slowdown in US growth.

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.