Weak growth and falling inflation puts the Investment Clock in Reflation. Detailed analysis of the last few decades shows that government bonds usually do well at this stage of the business cycle as central banks cut interest rates or, latterly, make outright bond purchases as part of a quantitative easing program.
For stocks, the historical record is mixed. Policy easing can drive an expansion in valuation multiples, as we have seen lately. However, a weak growth backdrop means optimism can give way to bouts of panic as earnings forecasts continue to see downgrades.
It is exactly this balance that is in play today. We have reduced the size of our underweight position in risk assets over the last few months to reflect the two way risk that policy easing brings to the market. However, it could take several months before the conditions for a new recovery are in place and there are likely to be buying opportunities along the way if economic data disappoints.
LEAD INDICATORS IN FOCUS
- Our global inflation scorecard points downwards and headline CPI rates have rolled over.
- Our global growth scorecard has historically been a good six month lead indicator for the business cycle.
- It peaked in May, but it turned negative in August for the first time since Q4 2011 on the back of a rolling over in the OECD’s lead indicators, declines in business confidence and economist GDP downgrades.
CURRENT ASSET ALLOCATION POSITIONING
- Improving US credit conditions mean we continue to like global property as an asset class.
- We see commodities offering similar upside to stocks if quantitative easing gains traction, therefore, we have reduced our underweight position.
- Other supportive factors for commodities include sentiment being less extended, positive seasonal factors and the asset class providing a hedge against geopolitical risks in the run up to the US Presidential election.
Trevor Greetham joined Fidelity in January 2006 as Asset Allocation Director. 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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