Not only should investors be trimming their underweights to equities, they should rethink what had become conventional wisdom in terms of geographic and sector allocation, according to Trevor Greetham, asset allocation director at Fidelity International. He believes the global economy will soon enter a “reflation” phase.

“Within equities, I think we could be seeing the start of some important new trends. I’ve moved US equities overweight at the expense of Asia and the emerging markets. I continue to move money away from industrials, including resources, covering an underweight in global financials held since April 2007, increasing my overweight in healthcare and moving slightly overweight the global consumer sector,” he says. “Financials and consumer stocks are historically the best performers in the reflation stage of the cycle and they’ve been underperforming the broader equity markets for a long time.”


 

2. Do nothing, at least as long as cash is yielding 8 per cent or so.

AustralianSuper has been the most celebrated advocate of this strategy to date. It’s investment committee has hoarded almost all of the $3 billion it received in the year to October in cash, while at schemes like AGEST and Seafarers Retirement Fund, the members have been rushing into ‘readies’ all by themselves. “It’s a brave fund which is not building up cash at this stage,” says Funds SA chief executive, Richard Smith.

“We need to be sure that the global banking system can be recapitalised… one plank of that is the rescue packages being accepted by markets.” Of course, even if you’re “doing nothing” it’s not a good idea to actually do nothing, especially since the risk/ return dynamics of the cash asset class were turned on their head last month by the Rudd Government guarantee on all bank and credit union deposits.

Australian fixed income broker FIIG Securities says investors should switch into guaranteed deposits or guaranteed debt instruments with the highest yield, irrespective of the issuer, as the Government’s decision to guarantee bank deposits means all issuers under the guarantee are essentially Australian Government AAA risk. FIIG Securities head of research, Justin McCarthy, calls the guarantee an “unprecedented opportunity” but warns investors to ensure their term deposit maturities occur within the three year time frame of the Government’s offer.

“The announcement by the Government means a complete change in the fixed income competitive landscape. Unusually, deposits with authorised deposit-taking institutions are now less risky than semi-government bonds. We expect State Governments to lobby the Federal Government for inclusion to remove this distortion. However under the current conditions, on a relative basis, term deposits or bank-issued guaranteed bonds offer a higher yield with a Federal Government guarantee,” McCarthy says.

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