The investment clock is in the equity-friendly ‘Recovery’ phase of the global business cycle with growth indicators positive and inflation indicators pointing downwards on the back of continued commodity price weakness.
After an eight month upswing, however, growth lead indicators are close to peaking and US economic data has surprised negatively. We reduced our large overweight in risk assets in March, primarily by selling commodities.
Risks of a downturn vary regionally and our preferences within equity markets reflect these differences. Japan’s prospects look best given unleveraged corporate balance sheets, outright fiscal ease and its plans to double the monetary base. The US is second best with limited fiscal tightening, open-ended QE and a housing recovery that suggests an end to deleveraging.
LEAD INDICATORS IN FOCUS
- Our global growth scorecard rose only slightly in March, boosted by improvements in business confidence and economic forecasts in Europe and Japan.
- Growth lead indicators appear to be close to peaking.
- Our inflation scorecard fell sharply on the back of commodity price weakness.
CURRENT ASSET ALLOCATION POSITIONING
- Japan is now our favourite market. Japan benefits from dollar strength and has a very positive domestic policy setting from an equity investor’s point of view.
- We continue to express a strong preference for US equities over Europe on the basis of a pro-growth policy mix and broadening signs of recovery in the housing sector.
- We trimmed our commodity overweight to neutral. Lead indicators are close to rolling over and the asset class is being hampered by dollar strength.
Trevor Greetham joined Fidelity in January 2006. He is Director of Asset Allocation and in addition to managing funds, Trevor is a member of Fidelity’s Asset Allocation Group. Prior to joining Fidelity, he spent ten years at Merrill Lynch, where he was Director of Asset Allocation. Trevor began his career with UK life insurer Provident Mutual. He holds an MA in Mathematics from Cambridge University and is a qualified actuary.
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