Adopting a suitable investment strategy for different stages in a market or economic cycle requires understanding what drives asset classes, says RLAM head of multi-asset Trevor Greetham in this video interview.
Talking to Professional Adviser editor Julian Marr in the above video, Greetham (pictured) says Royal London Asset Management (RLAM) is assisted in this aim by reference to what it calls the investment clock.
"Depending on where we are in terms of global growth and global inflation cycles, we tilt the portfolio towards either equities or bonds or commodities or cash," he explains.
"What we find is, for a multi-asset portfolio to be successful over the long run, you need to have all those asset classes in the mix to start with. Then, if you are analysing what is happening to growth and inflation, you can stack the odds in your favour."
Thus, Greetham continues, if growth is picking up, the team will favour stocks and commodities whereas, if it is slowing down, bonds and cash are the preferred call.
"Inflation matters just as much," he adds. "When it is falling, you want the financial assets stocks and bonds; when it is rising, you want cash and a barrel of oil."
At present, RLAM's investment clock is reading the cycle at an "early-stage overheat", where growth is strong and inflation is rising. This would normally see interest rates rising around the world.
However, as Greetham points out: "We are not seeing interest rates respond to the signals so we have really low rates everywhere. We are still printing money in this country - officially - as well as in the euro area and in Japan. At the same time the US is pussy-footing around in terms of doing some early interest rate rises."
This is a positive environment for stocks, he notes, before considering what could happen to move the global economy onto the next stage of its cycle.
"Either growth can weaken - and that can happen for no good reason," he explains. "Maybe there is a pause in growth or suddenly the stockmarkets falter and you are back in bonds again."
Alternatively, says Greetham, growth keeps on strengthening and inflation picks up. At this stage, when the market starts to worry about rate hikes damaging the stockmarket or bonds starting to sell off "big time", having commodities in a portfolio makes sense. "In overheat, normally commodities are your safe haven," he concludes.
To watch 'Multi-asset in retirement planning', please click here
To watch 'Grading multi-asset portfolios to match risk appetite', please click here
To watch 'Diversifying to counter market shocks', please click here
To watch ''Clocking' different stages of the economic cycle', please click here
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