It is very hard to make any convincing predictions after such a turbulent, but ultimately very rewarding year in 2009.
However, we still feel we will be able to generate positive returns in the year ahead and are confident we can still find a number of asset classes we favour going forward.
We have employed three central trades going forward; inflation, quality and yield. Within this we particularly like global inflation-linked bonds, agricultural commodities, high-quality equities and high-yield bonds.
In addition, we strongly believe after the uniform rally of all asset classes and individual investments, there will be a greater dispersion of returns this year and we will move from a “beta” to an “alpha” investment environment.
In such conditions, we feel active managers should flourish and long/short strategies could do very well.
We are likely to be faced with some great challenges in the months ahead. Certainly, equity markets are fast approaching our target levels, following the minor “Santa Rally”, which has seen most equity markets reclaim their highs for the year. We stand poised by the exit, ready to reduce some of the risk positions we have put on last year, and have identified a number of “sell” investments, which we will use to de-risk portfolios.
On macroeconomics, rate rises would not necessarily be the disaster for risk asset markets many are claiming, in our opinion. In fact, it might show we are returning to a more normalised environment and off the life support machine.
Rate rises are also likely to follow stronger than expected growth forecasts, which we believe is likely in early 2010. Furthermore, these hikes would help to ease the concerns of another asset bubble building through the ultra-loose monetary policy of central bankers.
However, it would also curtail the attractions of fixed interest investments and could lead to significant problems in government and corporate fixed interest markets. We are therefore very much “on guard” and vigilant with our fixed interest investments and prefer high yield over investment grade, backed up by zero-duration credit funds and RMBS.
Although we greatly prefer index-linked over conventional government bonds, we are also aware we would be unlikely to see positive returns from inflation-linked bonds, should conventional gilts sell off aggressively. We have had evidence of this in the mini bond bear market of recent weeks. Although we remain open to the possibility of a double-dip recession, we believe it is far more likely we have a “BBB” recovery; boring, bumpy and below-par. Our view is many markets are probably painting too positive a picture for such a scenario.
Thomas Becket is head of global investment strategy at PSigma Investment Management
