Threadneedle November Investment Strategy 2009
Sarah Arkle, Chief Investment Officer at Threadneedle, comments on investment strategy for November: "Global economic figures released over the last month have been rather more mixed than the generally better than anticipated figures seen in the previous months. One number that was very encouraging was for Q3 US GDP, showing an end to their recession and annualised growth of 3.5% during the quarter. We see US growth remaining resilient over the next couple of quarters due to restocking and the effect of the Obama stimulus package. We have therefore raised our GDP estimate for 2010 to an expansion of 2.0%. This is largely due to these one-off events rather than a belief that the underlying momentum of recovery will be especially strong. In contrast to the strong US bounce in Q3, the UK remains in recession having seen activity contract by 0.4% on first estimates. The UK remains poorly positioned relative to other economies and we have edged down our forecast for this year's growth to -4.5%.
"We continue to expect underlying inflationary pressure around the globe to be subdued due to substantial excess capacity combined with a slow economic recovery. However headline inflation, particularly in the US, will rise in the short term as the rapid collapse in oil prices at the end of 2008 falls out of the calculation. We expect headline US inflation to reach 3.0% by the end of this year.
"In recent weeks we have seen equities struggle to make progress and some rotation in the performance of sectors. Many of the more cyclical areas and financials, which were so strong in the rally, have lagged while a number of more defensive areas have seen better relative performance. We expect many of these quality, cash generative, less cyclical companies where relative valuations are low to show further performance. We also continue to like financials where the bounce in asset markets is very beneficial and profit margins have moved to healthy levels. Performance in the banking sector may be limited by the issuance of new stock to support capital ratios.
"Equities have enjoyed a huge bounce since the spring and the economic outlook is clouded. We expect a slow, difficult recovery and high commodity prices will be a further challenge. At the same time, the huge monetary stimulus that has been very beneficial for markets and economies will need to be withdrawn at some stage. However, monetary conditions will remain loose for now, corporate results have been good, economies are past the worst and we would expect M&A activity to pick up. In addition, investors still appear to be sitting on cash, some of which should find its way into markets, and valuations are attractive relative to history and the yield on cash. On balance, we remain overweight in equities. We also retain our bias for Asia/emerging markets despite their excellent performance, due to the significantly better fundamentals than those found in developed economies.
"Over the medium term we are cautious on the outlook for government bonds in developed regions. On the other hand, we do see further scope for spread tightening in investment grade and high yield corporate bonds and emerging market bonds. The property market has lagged other assets year-to-date and after a significant fall in asset values we see value appearing. However, tenant demand is weak leading to downward pressure on rents. Having been below benchmark in property for a lengthy period, we have moved to a neutral position."