Threadneedle July investment strategy 2009

Sarah Arkle, Chief Investment Officer at Threadneedle, comments on investment strategy for July: We are most positive on the prospects for investment grade corporate bonds and US dollar denominated emerging market debt. The latter has performed particularly well in recent months. Elsewhere, the high yield corporate bond market has rallied very hard over a short period of time. The market still looks cheap but investment grade appears better value on a relative basis. Current valuations for investment grade more than compensate for historic default risk and the market looks very appealing relative to gilts. Within government markets, we retain a preference for overseas government bonds as supply concerns continue to overhang the gilt market.

Equities

Last month the UK market retraced some of the gains made since the March lows. The market has seen further fund raisings as companies seek to reduce bank debt and there are some signs of investor fatigue. Corporate news has generally been better than feared, helped by cost cutting programmes. We continue to broaden our portfolios away from the core defensive growth stance held earlier this year. Stock picking is becoming increasingly important.

Corporate profit forecasts continue to be upgraded in the US and are fairly broad-based - it is clear that the market is starting to price in the bottom of the current earnings cycle. Moreover, due to cost-cutting, companies will have significant operating leverage into an economic recovery. We continue to find the market attractively valued, especially on a cash flow basis.

European markets have fallen back from their recent highs. The valuations of steady, defensive growth stocks that were left behind in the earlier beta rally now look relatively attractive.

Our preferred region continues to be Asia ex-Japan where markets are being underpinned by continued economic growth and relatively sound banking systems.

The rally in the Japanese market stalled in mid-June. We remain underweight in Japan, where we expect a larger fall in corporate earnings than seen in other major markets. Deflation risks have also risen.

Latin America's banking system appears relatively healthy. We are encouraged by the prospects for Brazil where interest rates are expected to fall further, supporting the growth of domestic consumption. Mexico is being hampered by its close ties to the US.

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.