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Best Invest's asset allocation comittee met last month to discuss strategy for their funds amidst Eurozone turmoil. The article below is the minutes of the meeting which may be of interest to you if you are following the markets.

The challenging economic headwinds showed no sign of relenting as Bestinvest’s Asset Allocation Committee met again recently.

Trouble in the Eurozone continued to bubble and although a €1 trillion injection from the ECB bought some much needed time, helping to ease fears and support asset prices, a long-term solution has yet to emerge.

Austerity still dominates across vast tracts of the world and synchronised programmes look likely to put the brakes on growth. The UK continues to grapple with QE, inflationary pressures and extraordinarily low interest rates while, in the US, government finances are deteriorating, although efforts to address this will have to wait until after this November’s presidential elections.

Against this backdrop, we think consensus economic growth forecasts are looking too optimistic, particularly for 2013, and current high-level profit margins are unsustainable. Inflation also looks unlikely to fall as much as consensus expects this year and over the longer term we expect it to head higher, driven by emerging market demand for materials and foodstuffs.

Equities

Equity markets have been firm in recent months but we think they are likely to trade within a range and currently appear at the top of this range. In spite of this, we don’t think it is worthwhile selling now and instead are continuing a process of buying into dips.

On valuation grounds, US equities currently look dear and the UK equities fair value. European equities are cheap and Japanese equities even cheaper. Emerging markets and Asia Pacific equities are fair value and we think over the long-term have the best growth and hence currency prospects. Over the next three months we plan to top up holdings in Japan and emerging markets.

We continue to favour defensive, larger-sized businesses with growing dividends.

Fixed income

Bonds continue to provide important diversification in portfolios. We currently view government bonds as unattractive because of their exceptionally low yields (2.2% US, 2.25% UK, 1.85% Germany and 1% Japan) and prefer investment grade corporate debt.

A low default outlook makes high yield bonds relatively attractive although spreads have come down. However, a lack of liquidity, especially in times of distress, does increase their correlation to equities so where risk is an issue we prefer shorter duration funds where accessible. Our asset allocation remains unchanged.

Property

We have reduced our exposure to property in favour of Japan and emerging markets equities. Total returns on property have peaked and while foreign fund flows are supportive of prime London properties, the city does become less attractive when financial services are struggling. Banks may also be unable to avoid a glut of distressed properties for sale this year given the weight of debt refinancing and capital ratio targets.

Hedge funds

The majority of hedge fund strategies have performed well until recently as the correlation between sectors and within sectors weakened. As a ‘risk off’ environment returns, the outlook remains challenging. Our exposure remains unchanged.

Commodities

Commodity prices have firmed this year but higher prices act as a tax on consumers and retard growth. Supply and demand characteristics continue to be mildly supportive but prices at the margin are driven by speculators. Over the long term, the outlook for commodities remains favourable. We have not revised our exposure to commodities.

Is now the right time to invest?

Becoming jittery over investments is common in difficult economic times and this can lead to a tendency to stay out of the markets or to try to time them. Timing markets is always fraught with danger and while wealth will remain secure if kept as cash in a savings account, finding one paying a real rate of return after adjusting for inflation is a tall order.

The outlook is challenging and investors should certainly brace themselves for further volatility but those willing to commit can still find opportunities and the potential for returns. View the funds in equities and fixed income that we particularly like.

Important information

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact your Financial Adviser. This article is provided by Best Invest. FMB is not responsible for third party communications.

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