Start to bottom-fish in investment grade corporates

Cash / Fixed income

The deepening of the credit crisis makes our large precautionary cash balance all the more appropriate. We also suggest further enhancing the protective feature of the government bond allocation by increasing duration slightly and using steepener products, particularly in Europe.

At the same time, recognizing that investment grade credit spreads are now pricing in a dire default scenario - by historical standards - we recommend looking for investment opportunities in that area. The same is not, however, true of high-yield corporates, which should thus continue to be avoided.

Equities

Although the equities markets held up in February in the face of sharply widening credit spreads, we remain comfortable with our reduced exposure. Visible growth and earnings resilience remain our priority. Regionally, we continue to favor emerging markets, albeit focusing on domestic demand stories. We are agnostic as regards United States vs. Europe - although the former is in the eye of the storm it is also getting more support from aggressive monetary and fiscal policy. Finally, we confirm our cautious stance on the financial sector, with further negative news flow expected.

Alternatives

Within hedge funds, our preference currently goes to strategies that exhibit a low correlation to equity markets.

Commodities have surged recently, as highly risk-averse investors have taken shelter in "real" assets. While long-term supply-demand trends remain supportive, we caution that some short-term profit-taking is possible, particularly in soft commodities, warranting temporary protective measures.

Currencies

We retain our bearish stance on the dollar - and limited exposure - as the Federal Reserve continues to aggressively cut interest rates, and the gradual shift away from a dollar-centric world progresses.