Investments move in unpredictable ways. However, a study of how economies have performed over recent decades shows they tend to move in cyclical patterns.
The economic cycle can be split into four phases – reflation, recovery, overheat and stagflation.
Each of these phases is characterised by the direction of economic growth and inflation. During each distinct phase there is an investment type that will tend to perform better than others.
Great expertise is needed to decide where we are in the cycle. An economy can go backwards or even miss a phase, and a full cycle can last three to seven years. Detailed analysis helps the fund manager adjust the balance of holdings within asset classes, as well as between them.
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reflation means the rates of economic growth and inflation are both falling – this tends to favour bonds
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recovery tends to be good for shares, because growth has started to pick up but inflation is still falling
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an economy is said to be overheating when growth and inflation are both on the rise, and this is when commodities are likely to outperform other investments
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defensive investments, such as cash, may be worth emphasising during stagflation. This is when inflation is rising but growth has passed its peak.
