Threadneedle May Investment Strategy 2009

Sarah Arkle, Chief Investment Officer for Threadneedle, summarises the May Investment Strategy: Bonds - The weak economic backdrop, low inflation and quantitative easing are supportive for gilts although concerns remain over the sheer volume of new issuance and the poor state of the government's finances, which suggests the risk of a downgrade to the UK's AAA rating. While the second quarter is often a tough period for the gilt market, we would view any meaningful rise in yields as a buying opportunity. We are currently most constructive on the credit markets, where valuations are still very attractive and a lot of bad news has already been priced in. Moreover, the technicals for both investment grade and high yield have been improving, with a pick-up in demand for both asset classes. Emerging market bonds have performed well over the last month. Weaker economic growth and falling inflation are enabling interest rates to fall.

Equities

The UK equity market has rallied strongly from its lows of early March, driven by an improvement in risk appetite. However, we expect the UK economy to remain weak due to the need for consumer deleveraging and we believe sterling is vulnerable to weakness. We favour a neutral position in UK equities.

We have been adding to our US equity exposure in recent months and retain a constructive view on the market. We are able to find a large range of strong US companies with a global presence. These should be well placed in the current environment.

We favour a small overweight position in European equities. Valuations are low and the issues over consumer debt and inflated house prices are less of a problem than for the US or UK.

Our preferred region is Asia ex-Japan. Regional markets have continued to respond positively to evidence of economic stabilisation, with Q1 GDP numbers for China and Korea coming in ahead of market expectations. Stimulative measures by the Chinese authorities appear to be having a beneficial impact on economic activity.

We prefer an underweight position in Japan. Exports have collapsed and consumer confidence has fallen sharply. We expect a larger fall in corporate earnings than seen in other major markets.

Latin American economies are slowing markedly which will put severe pressure on corporate earnings this year. Longer term, the economic outlook appears positive given the region's strong banking systems, low external debt levels and functioning political systems.

Property

Key factors helping to stimulate investor interest in the UK property market include positive financial arbitrage between income yield (which is rising) and borrowing costs (which are falling). The UK is also further through its pricing correction than competing markets in Europe, and the depreciation in sterling has helped to stimulate investment from euro-based investors.