Threadneedle June investment strategy 2009

Sarah Arkle, Chief Investment Officer at Threadneedle, comments on investment strategy for June: Bonds -While the fundamentals for gilts remain positive in terms of the poor economic background, the technicals are negative given the sheer scale of governance issuance and the risk of a downgrade to the UK's AAA rating. Last month, S&P lowered its medium-term outlook from stable to negative. We continue to be most constructive on the credit markets and remain overweight in both investment grade and high yield corporate bonds. Although the fundamentals are still poor the technicals have improved, with strong demand for both asset classes. Valuations for investment grade are close to the best in 100 years and more than compensate for historic default risk, while last month the strong performance of high yield eclipsed most other areas. Emerging market bonds have continued to perform well, buoyed by the rebound in risk appetite. Overall, we retain a preference for risk assets over government bonds.

Equities

The rally in the UK market since early March has been powered by a very rapid shift in sentiment. The strong performance of the Mid 250 versus the FTSE 100 has highlighted the sharp turnaround in risk appetite. Company results have been slightly better than feared and stocks have responded well.

Over the past month, the US market has successfully negotiated two potential hurdles, namely the Stress Test for US banks and significant equity issuance. Following some encouraging signs in Q1, the key drivers will be the earnings performance of the market and its valuation. We retain a constructive view.

European markets have also benefited from the improvement in risk appetite amid hopes that the global economy is stabilising. Even after the rally, valuations do not look stretched and we favour a small overweight position in Europe.

Our preferred region is Asia ex-Japan where markets are being underpinned by continued economic growth and relatively sound banking systems. There is greater confidence in an earnings rebound and domestic liquidity is abundant, which is also proving supportive for the Hong Kong property market.

We prefer an underweight position in Japan, where we expect a larger fall in corporate earnings than seen in other major markets. Within the market, cyclical leadership has continued aided by better-than-expected industrial production data.

Longer term, the economic outlook for Latin America appears positive given the region's strong banking systems and low external debt levels.

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.