The last three economic upswings since the financial crisis all ended with our inflation scorecard pointing upwards and central banks, tightening policy. This one is different. Continued commodity price falls are pushing inflation lower.
However, the Investment Clock remains in the equity friendly ‘Recovery’ phase of the global business cycle. Disinflation is also likely to see monetary policy remain accommodative, which is good news for stocks.
Given the signs of recovery in US housing it is possible to imagine a situation in which the US economy holds up while Europe and Asia bear the brunt of weaker industrial activity. Continued dollar strength would keep commodities under downward pressure, while policy ease from the US Fed will make this a somewhat self-reinforcing cycle.
We expect to see US equities outperform strongly in this scenario, with bonds yields dropping a little and interest rate sensitive property doing well. Japan has seen a bout of volatility lately, but a continued domestic recovery, coupled with strong exports to the US, should insulate Japan against weakness from Europe and the rest of Asia.
LEAD INDICATORS IN FOCUS
- Our global growth scorecard dipped in April for the first time since last summer on the back of weaker US business confidence and falls in some lead indicators.
- However, with monetary policy likely to remain accommodative we are hopeful the slowdown will be short lived.
- Falls in commodity prices have helped suppress our inflation indicators giving central banks more room to manoeuvre
CURRENT ASSET ALLOCATION POSITIONING
- We have moved towards a neutral position on risk assets but retain a strong preference for stocks and property over commodities within risk assets.
- Japanese equities remain our favoured region despite recent volatility; it Is a major beneficiary of a stronger dollar, and domestic growth is likely to surprise on the upside.
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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