We have become more cautious on the overall outlook for equities versus bonds as the year has progre...
We have become more cautious on the overall outlook for equities versus bonds as the year has progressed.
This is a reflection of our view that there is likely to be a further round of interest rate rises throughout most of the major economies and that liquidity conditions are consequently likely to become more restrictive.
Moreover, this final round of tightening, driven by inflation concerns, is likely to come against the backdrop of further news that global activity is beginning to slow.
Thus, with the increased risks surrounding the impact of tightening, it is possible that the performance of equity markets could be inhibited by an outflow of liquidity to other financial assets.
The global background has seen a distinct change of tone in the past few months.
The OECD leading indicators have begun to turn down, which appears to signal that the current and previous bouts of monetary tightening are beginning to take effect.
The key question now is whether the consumer sector will slow in time to limit pent-up inflation pressures.
On balance, we think that higher oil prices, high real yields and further monetary tightening will help to bring about a deceleration in the second half of the year and prevent a significant rise in inflation.
Further interest rate rises are also expected in continental Europe and, to a lesser extent, the UK. In Japan, there has been continued recovery in activity. There are signs that production may be about to reach a peak but consumer activity is beginning to benefit from previous production increases.
Elsewhere in Asia there are also signs that growth may be starting to peak. However, we are still looking for further growth in the course of 2000, even though there is the likelihood of slower world trade.
In the short term, the environment is not favourable for equities. However, the combination of growth without inflation remains in place for the medium term.
Against this background, bonds are expected to remain relatively well underpinned, although the gains made so far this year mean that the scope for further upside is now becoming more limited
Over the course of the 1999, our Managed Funds were overweight equities and underweight cash. However, over the course of the first half of this year we have steadily reduced the equity exposure. We are now underweight in all equity classes, with the exception of Japan and emerging markets where we are neutral.
We have steadily increased our bond weighting to the point where we are now overweight in bonds, primarily through exposure to overseas index linked instruments. We are also marginally overweight UK property and cash.
Adrian Wallwork is a director at AXA Investment Managers UK
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