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June 24, 2009 - ,

Investment Strategy: June 2009 – Short-term cyclical rebound is confirmed

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An extract of the June 2009 edition of Investment Strategy:

Short-term cyclical rebound is confirmed

Indicators of economic activity and confidence have continued to improve over the past few weeks. After falling to extremely low levels in late 2008 and early this year, economic conditions seem to be showing signs of a short-term cyclical recovery. Although the pace of deterioration in the manufacturing and services sectors has slowed, the longer-term outlook seems less encouraging.

Dark clouds behind silver linings

The process of deleveraging household debt and the negative wealth effect resulting from lower house and equity prices will almost certainly continue to be a drag on the global economy. After bouncing back from the severe economic shock seen last fall, growth is likely to remain below potential for quite some time. At least in the developed economies. Although the economic policy actions implemented are beginning to bear fruit they are also raising some fundamental questions. For example, after such explosive growth, are public debt levels sustainable and for how long can they be financed? Is there not a risk that extremely accommodative monetary policies (with unprecedented quantitative easing) will pose insoluble problems to monetary authorities when it comes time to return to a more normal situation? By cooperating so closely with government authorities have central banks sacrificed some of their independence and risked tarnishing their credibility?

Hard to be sanguine about equities

Investors have many things to be concerned about over the medium term and there is little chance that equity prices will calmly keep rising in this environment. This vulnerability could be further accentuated by overbuying and other negative technical factors in many equity markets, now that valuations are less attractive. The resurgence of risk appetite will not last forever. Still, over the next few weeks the current optimism could cause investors to ignore some of the more unpleasant questions. So this “self-sustaining” rally may perhaps continue over the very near term. Furthermore, when equity markets hit bottom last March the main economic scenario was extremely negative and there were deep concerns about the financial system. Since these uncertainties have eased this should limit the consolidation of equity prices that will follow three months of sharp gains, with the MSCI AC World index gaining 45% since March 9. We recommend maintaining a near neutral position in equities with a slightly positive bias. As during the previous months, this cautious asset allocation may include an overweight in investment-grade credit, where valuations are still attractive despite recent gains.

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About …
“Investment Strategy”sets forth the different asset allocation choices which are implemented in BNP Paribas Asset Management’s portfolios. The investment strategy derives from a running analysis of numerous factors (i.e. the general economic situation, earnings growth rates and financial ratios, assessment of market valuations, technical analysis).

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