Trevor Greetham's Investment Clock June: Policy divergence opportunities

Our global growth scorecard has been positive for 18 months. Our big picture view is that we are in a disinflationary and desynchronised global recovery with steady expansion in the US driving above-trend global growth while the slowdown in China keeps commodity prices and inflation under control. This backdrop allows G7 central banks to keep policy loose but with different economies at different points in the business cycle, monetary policy divergences will create opportunities.

However, recent mixed growth and inflation indicators mean the Investment Clock model that guides our asset allocation is the closest to neutral that we can remember.

We are hopeful the growth picture will resolve in a positive way and we do not expect commodity price strength to persist, however. With the clock likely to move back towards the Recovery phase, summer volatility may provide an opportunity to rebuild a larger overweight in equities.

LEAD INDICATORS IN FOCUS

Growth

Our growth scorecard has risen recently though this is largely due to the bounce back in economic data in the US after bad weather in Q1 and we are not yet convinced this mini cycle has troughed.

Elsewhere in the world the outlook is mixed. The Chinese residential construction sector remains weak but other economic data has stabilised. Japan’s sales tax rise is triggering a temporary recession. The UK economy is strong but activity is cooling off.

Inflation

Ample spare capacity should keep inflation low but commodity prices are up year to date.

CURRENT ASSET ALLOCATION POSITIONING

We have been overweight equities since 2012 on the back of continued recovery with loose policy and muted inflation. However, we took some profits following a softening in growth indicators. Summer volatility may present some opportunities.

We remain underweight commodities. Excess capacity, US dollar strength and slower growth in China are headwinds.

We are underweight government bonds – yields should gradually rise as central banks normalise policy.