London & Capital has deployed its cash stock pile to up its exposure to equities and commodities, but warns that there is likely to be a “rocky road ahead.”

The volatility of the markets has proven to be a real headache and while there are green shoots of a recovery, investors should remain cautious, says Neil Michael, the firm’s director of investment strategies.

Michael notes that the economic outlook is gloomier now than at the turn of the year, with several leading indicators trending downwards recently. With interest rates at real lows, London & Capital advocates a focus on income-producing assets such as large cap developed high dividend yielding stocks, short-dated government bonds and higher yielding corporate and emerging market bonds.

Despite the rocky road which likely lies ahead, with Michael predicting a sluggish and bumpy recovery over the next year, he is also cautiously optimistic.

“We see inflationary pressures calming as fiscal austerity kicks in and demand is detrimentally affected. This, coupled with a not insignificant output gap, underpins the prolonged low interest rate cycle,” he says.

“We are also beginning to see signs of a slight firming in the recent soft economic patch, with some of the causes of the recent deceleration in economic activity beginning to reverse.  Industrial production in Japan has bounced back, easing global supply chain problems, commodity prices have come off their peaks, and bond yields have fallen. This is a good foundation for economic activity to gain traction by the end of the year.”

Off the back of these factors London & Capital has started to up its risk levels, buying some equities and commodities exposure. But the firm is still concerned about the parlous state of public finances in Europe and the US.

“Sovereign debt problems in Europe and the US persist (although policy makers will pull back from the brink), and we have the economic headwinds of consumer and banking deleveraging, so we are keeping some powder dry for the time being,” says Michael.

“The upshot is an uneven recovery with waves of economic optimism, followed by waves of economic pessimism.  It means we must all remain doubly vigilant in navigating changes in market, credit and interest rate risk.”