Threadneedle October investment strategy 2009

Sarah Arkle, Chief Investment Officer at Threadneedle, comments on investment strategy for October: "Expectations for economic recovery continue to be revised up as a number of major economies have now emerged from recessions. Our forecast for growth remains below consensus for 2010 in anticipation of a slow recovery as consumers pay down debt and western governments start to address their fiscal deficits. Against this background of sub-trend growth and considerable spare capacity we believe underlying inflationary pressures will be muted for the foreseeable future. However, we have edged up our forecast for headline US inflation for the end of this year due to the mathematics of the big oil price fall in 2008 dropping out of the calculations.

"US dollar weakness has been a significant feature this year. We do not expect a reversal of this trend in the immediate future with interest rates in the US remaining extremely low and the authorities being very happy to have a weak currency to benefit the trade balance and growth. As stronger growth becomes more evident next year, we may see greater support for the dollar. Sterling has also been a weak currency recently. We believe the pound is vulnerable to further weakness but would not expect it to move out of the 0.85 to 0.95 range against the euro.

"Our equity strategy continues to be a barbell approach. We see excellent value in many good quality, strong blue chip companies that have been left behind in the rally. At the same time, with a better growth outlook, increased risk appetite among investors and generally improved access to capital we see attractive opportunities in some more cyclical companies and weaker balance sheet companies. We particularly look for situations where a company's prospects are being transformed through management changes or restructuring. We also expect bid activity to pick-up which should highlight companies with attractive assets.

"We have raised financials to overweight in our global sector views. Profitability of banks is currently high, with ready access to cheap finance which can easily be deployed in markets with good returns. In addition, lending spreads in traditional banking are very healthy. We have also raised industrials to overweight as beneficiaries of restocking, with valuations that are still attractive by historical standards.

"Recent comments from the US Federal Reserve have made it clear that the current accommodative policy will be maintained for at least the next six months. This has effectively postponed the problem that investors in risk assets will eventually need to face, and provides the scope for further progress in markets.

"In the meantime, flows into risk assets continue. Until now, the principal beneficiaries have been investment grade, high yield and emerging market bonds, but there are signs from the UK life and pensions industry of allocation moves into equities. With many good quality companies' shares yielding more than their bonds, a move from credit into equities seems a logical next step for asset allocators that have so far focused on the former. "Equity markets have moved a long way on little volume and there are significant sums on the sidelines awaiting investment. With valuations still reasonable, markets can continue to rally as this cash is deployed.

"We therefore remain overweight in equities. We continue to favour Asia and Europe on a regional view, with Japan our only equity market underweight. In fixed income, meanwhile, our overweights in investment grade, high yield and emerging market bonds have served us very well and these positions remain in place. Property is starting to attract interest, having recently delivered its first positive monthly return in this cycle. We are moving to a more neutral position in property. Finally, with cash offering little reward, we are happy to be underweight."