Deploy cash into emerging debt, non-investment grade credit, as well as equities

Cash / Fixed income

The various measures taken by monetary and regulatory authorities have succeeded in curbing the vicious spiral. The financial crisis is not resolved, but it has stopped worsening. Investment-grade credit spreads now adequately reflect balance sheet risk, justifying our recent increased exposure, which we funded by selling government bonds.
 
Although spreads have recently retreated sharply from their crisis highs, there is still a value case to be made outside the investment grade space, leading us to deploy some cash into non-investment-grade credit on a selective and diversified basis.

Emerging debt is also attractive from a yield perspective - with the added benefit of potential currency appreciation when denominated in local currencies.

Equities

With systemic risk now lower, we have also put some cash to work in equities. Nonetheless, we are maintaining an underweight allocation ahead of a potentially lengthy earnings down-cycle, and given that our exposure to non-investment-grade credit entails an "equity-like" risk.

We have not changed our regional stance - a selective emerging markets bias and a balanced view between the United States and Europe. We are also maintaining our overall preference for large-cap visible/resilient growth but are starting to look - selectively and in a diversified manner - into heavily punished sectors, which are furthest ahead in discounting the earnings down-cycle.
 
Alternatives

While the long-term supply-demand dynamics for commodities remain strong, we reiterate our short-term caution, particularly in soft commodities futures. We favor pure gold exposure - as a hedge against financial turmoil, inflation, and geopolitical risks.

Currencies

We retain our bearish long-term stance on the US dollar, viewing the recent rebound as a hedging opportunity. We are also looking to gain exposure to the emerging currencies de-pegging story - an attractive medium-term "macro" opportunity, de-correlated from other asset classes.