PSigma Investment Management is moving to a “neutral” stance on stocks, reducing its exposure to this asset class and building holdings of cash due to worries about the twin risks of inflation and deflation, coupled with the belief that economic growth will be modest at best.

Without a clear direction from financial markets or fundamental economic trends, the UK-based asset management firm prefers to take a safety-first stance and remove risk exposure from the table.

“In recent sessions we have also started to reduce our equity weightings from an overweight to a neutral stance and have added yet more focus to higher quality, dependable businesses at the expense of cyclical companies. We had been running with an aggressive stance to risk since the start of Q3, but believe that the risk/reward balance has now shifted and profit taking is sensible,” Tom Becket, chief investment officer, said in a note.

“Markets are again becoming harder to navigate and economies are increasingly difficult to predict. The summer has once again not become an easy time for investors, who are nervously watching and waiting for the next moves by central bankers and poring over the deluge of data that afflicts us all. The pendulum is constantly swinging from over-optimism to over-pessimism and back again,” he continued.

“Whilst many risk assets are gaining upward momentum, perceived 'safe haven' assets, such as US treasuries and the Japanese yen are also reaching new heights. These perplexing cross currents are causing us and the wider market some concern. Clearly the tug of war between the 'deflationists' and 'inflationists' is intensifying, with commentary on both ideas reaching a crescendo, as recent economic data has been both ambiguous and thoroughly confusing,” he added.

Becket said his firm sees “no value at all” in conventional government bonds or high-grade corporate bond. It has reduced its corporate bond exposure, following a period of strong performance by this asset class.

Despite its caution on equities, Beckett said that many companies’ shares did not appear to be “wildly overvalued”, particularly if firms are able to reap profits as expected over the next two years.

Becket said it did not expect a “double-dip” recession, which he said were historically very rare; the current slow growth is an expected slowing in the pace of growth from the strength of the past six months.

“Now is not the time for taking huge bets in portfolios or our wider investment strategy, but nor is it a time for despair and extreme defence. Despite the amelioration in the global economy and markets over the last year, there are still a number of unanswered questions and persistent problems that are yet to be resolved, particularly the binary outcome of the deflation/inflation debate and the severe indebtedness of the developed world,” Becket said.

“Whilst this remains the case (and it might be for a very long time), we believe that it is prudent to pocket some of the excellent returns gleaned over the last 18 months and move some firepower to the sidelines. This should allow us the ability to add risk back into our strategy, should the opportunity present itself. In addition, should asset markets continue their recent impressive ascent, we feel that we have sufficient exposure to equities, credit, commodities and property to achieve our ultimate investment aims,” he added.