Trevor Greetham's current views: "Firmly back in reflation"

Firmly back in reflation
The Investment Clock is firmly in Reflation, which typically favours bonds over equities and commodities, and within equities, defensive sectors over economically sensitive areas. Macro data was mixed over the month with key US releases coming in ahead of expectations while Europe weakened further. Euphoria over the Eurozone Summit rescue plan was short-lived and the focus is back on Italian sovereign bonds. The outlook for growth depends largely on the effectiveness of unconventional monetary policy while banking stress is evident and fiscal policy is tightening. Investors should expect short cycles driven by bouts of stimulus – the ability to dynamically allocate between asset classes remains key.

LEAD INDICATORS IN FOCUS
Inflation

• The inflation scorecard remains in negative territory.
• Headline CPI is still rising for the G7 economies, but pressures at the margin are easing. This is due to the lagged nature of declines in commodity prices, such as oil coming through in official measures of inflation. Businesses are also reporting a fall in their input prices as activity slows.
  Growth
• The global growth scorecard remains in negative territory.
• Global growth deteriorated over the summer as confidence weakened and economists downgraded their forecasts. The scorecard is less negative this month after both the US Federal Reserve and the Bank of England expanded their purchases of long dated bonds.

CURRENT ASSET ALLOCATION POSITIONING

• In early August, we moved underweight stocks and commodities and increased bonds to a large overweight position. More recently, the cash position was also increased to a moderate overweight in the light of heightened levels of stock market volatility.
• Within equities, we continue to favour the more defensive markets of US, German andUKequities. Within sectors, we prefer defensive parts of the market such as healthcare and consumer stocks at the expense of cyclical areas like materials and industrials.

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