Does a growth stance remain the best placed position?
We have been broadly cyclically positioned in our funds for some months, both in terms of sectors - with overweights in minerals, technology and media - and geographically, where favoured markets have been Asia, Europe, Latin America and more recently Japan. The success of these positions has been mixed. Cyclical sectors have performed in fits and starts, doing well when the economic reports confirm the unfolding recovery, but disappointing when the data fails to live up to expectations or geopolitical news flow turns negative.
We continue to believe the global economy is on a recovery path, with recent positive jobs data from the US supporting our view. Elsewhere, Japanese growth is showing encouraging signs and deflation is abating; China continues to expand robustly; the UK remains strong despite the Bank of England's proactive monetary policy and Europe is on an improving trend. All of which leads us to the conclusion that our growth stance remains appropriate.
However, cyclical outperformance is notoriously fickle and the picture has undeniably changed since economically sensitive sectors started to rally a year ago. To this end, we have reduced our positions in early cycle beneficiaries such as industrials, adding to areas such as retail, which we expect to do well later in the recovery phase, and to attractively valued long-term growth franchises.
Meanwhile, mid caps have outperformed globally over the past year, and this has been a big winner for us in portfolios. As a result of this strong run, valuations between mid and large caps have converged, and we now think that mid caps en masse are less likely to outperform significantly going forward. Taking profits in medium-sized stocks and adding selectively to oversold large-cap names has been another hallmark of our strategy in recent weeks.
At the geographical level less has changed. Our favoured assets remain higher risk ones such as Asian and Latin American equities and emerging market bonds. All of these areas will continue to benefit from the global economic recovery in the form of strong demand and high commodity prices. Asia, in particular, also boasts very attractive valuations, and has the added attraction of a swathe of elections in the coming months, which should ensure that monetary and fiscal policies remain positive.
We have added Japan to our list of geographical overweights over the past few months. The improving economic data alluded to above has drawn in huge volumes of foreign money, driving the market sharply higher. We think the economic recovery will continue to whet investors' appetite, and that further (more modest) gains can be made.
The main beneficiaries of the stronger economic picture are high yield corporate bonds. This asset class has performed extremely well over the past 18 months. The global economy has been confirmed on its recovery path; risk assets should resume their outperformance as the year progresses and our portfolios are positioned accordingly, with a watching eye on relative valuations and the maturing economic cycle.
Alex Lyle, head of managed funds, Threadneedle Investments
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