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Unsurprisingly, recent data releases are generally indicating a deteriorating global economy. We believe the environment is likely to remain challenging for risk assets (equities, corporate bonds and property, for example) as the tightening of credit conditions feeds through to consumer spending and economic growth prospects.

Market volatility looks set to continue for some time but so far it has thrown up some interesting investment opportunities for us.

After the last few years of easy credit conditions and historically low default rates, credit markets are now pricing in significant default risk. Given that sub-investment-grade bonds are now yielding in excess of 10 per cent, we believe that select opportunities within this asset class could be very attractive for long-term investors.

Equity markets are also offering value. Stockmarket volatility will remain high but we will be looking to take advantage of low valuations and increase exposure over the next 12 months.

As the year progresses, within our multi-asset team, we expect a degree of recoupling between developed and emerging economies which will require a more balanced exposure to equity markets. This is in contrast to 2007, where our equity strategy exploited two themes – on the one hand, our positioning in developed markets has been very defensive. Within these regions, we reduced exposure and favoured big companies over small companies, and focused on growth and quality stocks (away from value).

On the other hand, we have had significant exposure to Asian and emerging market equities over the last year, given the stronger economic growth prospects.

Turning to currencies, we expect sterling to continue to weaken over the next few months. Slowing consumer demand, combined with a sluggish housing market, is expected to lead to further base rate cuts. We believe this spate of high-risk aversion will increase concerns over macroeconomic imbalances and that the UK’s current account deficit and high levels of consumer debt will weigh on investor sentiment.

Many emerging economies are benefiting from looser US monetary policy but inflationary pressures continue to mount and policy intervention in China, Singapore, Malaysia, India and other countries seems inevitable. We remain positive on select emerging market currencies – particularly those of South-east Asia – as we anticipate that policies aimed at curbing inflationary pressures will entail currency appreciation.

Johanna Kyrklund is manager of the Schroder diversified target return fund


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