INVESTMENT CLOCK - June 2011

The Investment Clock is prepared by Trevor Greetham, Asset Allocation Director at Fidelity. The assessment of the investment clock and the current economic and market woes globally, are indicative of the actual performance in those markets. That is to say, growth is strong, but markets are weak. The investment clock is in its fourth month in the 'overheat' quadrant as global growth is strong although you would be forgiven for raising an eyebrow. The world economy is unlikely to maintain this pace of expansion for long as the Federal Reserves latest stimulus (known as QE2) is ending, other central banks are tightening monetary policy and high energy prices are squeezing consumers (higher energy prices act as a tax on the consumer). At the margin, worrying factors are appearing the European Central Bank has increased rates, growth forecasts for Japan and the UK are being cut and business confidence is rolling over from peaks. As uncertainty rises, financial markets are rightly drifting lower on thin trading volumes as the impending test approaches. Asset allocation is the way in which professionals allocate capital to investments. The current rolling over from the peak suggest a trimming of equities, property and commodities in favour of bonds. But would you be enamoured with - for example - a US Government bond paying 2.95% per annum for the next 10 years? Neither would I. It remains to be seen if recent weakness in economies is a temporary effect. If it is fleeting, stocks may make further gains in coming months despite our trimming of portfolio weight. Within global equities, you have to be judicial in your allocation as there is huge disparity emerging from one economy to another. For the first time in a long time Australian equities (stocks) are perhaps the most attractive anywhere in the world. Within equity sectors, it may be smart to take more defensive positions such as consumer brands and healthcare stocks. However there is little economic and market clarity at present and these decisions may prove to be incorrect if growth resumes in the of stimulus, that is organically. Global bonds are perhaps a more clear no go zone - in a rising rate market the value of bonds diminishes. Without clarity, the contrarian investor may be rewarded handsomely for taking the opportunity to stock up on cheap investments. For example, the forward earnings on US S&P500 companies is tipped to rise 18% in the year ahead, whereas the index has drifted lower by 8% in the last month or so. One of those is wrong - either earnings will drop or prices will rise. I think the former is more likely.

The investment clock approach generates growth and inflation readings based on past trends and current momentum of lead indicators, to help forecast how the global economy may perform in the coming three to six months. The growth reading sets the relative weighting of cyclical and defensive assets (north-south on the clock diagram). The inflation reading sets the weighting of financial assets versus real assets (east-west). The investment clock is not intended to inform investment decisions and does not form a guarantee of future investment performance. Future investment performance will be effected by unforeseen factors. Any investment you make must take into account your personal circumstances and be made by a authorised adviser.