While better than anticipated figures over the last few months raised expectations, the third quarter has delivered somewhat more of a mixed bag, says Sarah Arkle, chief investment manager at Threadneedle.

Last month Threadneedle was bullish on equities, upgrading its position on financials and industrials. This month, according to Ms Arckle, the emphasis is on defensive stocks.

Cyclical areas and financials were strong in the rally but have since slowed and are now being outperformed by more defensive companies. Threadneedle expect many of these quality, cash generative, less cyclical companies, where relative valuations are low, to show further performance.

Overall, loose monetary policy in the short-term, strong corporate results and rising numbers of merger and acquisitions are offset only by high commodity prices and fading support from stimulus packages. Therefore Threadneedle remains overweight on equities, especially in Asia and emerging markets where fundamentals are stronger than in the developed world. 

A figure of 3.5 per cent for third quarter US gross domestic product heralds the end of America’s recession, while the UK shrank 0.4 per cent.  Hence Threadneedle forecast a total expansion of 2 per cent for US GDP over 2010, and a retraction of -4.5 per cent for the UK.

Although Threadneedle is cautious about government bonds from developed countries, it sees potential for spread tightening in investment grade and high yield corporate bonds and emerging market bonds.

Finally, Ms Arckle notes that property has trailed assets, but low rents have prompted Threadneedle to move its position upwards, to neutral.