Percival Stanion, global head of multi-asset portfolios at Baring Asset Management in London, says his flagship fund now has 30% weighted to equities. That is slated to rise, perhaps to 50%, but he is waiting for more clarity in Europe before making any moves.

Another factor that should encourage equities is to see emerging-market central banks loosen monetary policy. Inflation fears have forced EM authorities to keep their feet on the brakes. However, inflation is moderating and emerging markets will probably need to stimulate their economies to compensate for weakness in key Western export markets.

What about the idea of emerging markets contributing to a eurozone rescue fund?
Why should China or Brazil, with lower per-capita GDP and higher savings and productivity, bail out Greece? The same could be asked of poorer European countries like Slovakia.

How would you judge European efforts to resolve the eurozone crisis?
People are avoiding catastrophe, but not enough to start a new bull market in equities. We will revisit this situation for many years before the West’s political bedrock gets shifted.
To what extent will Germans support southern Europe? The south can’t be just like Germany and have a current account surplus, at least not without also suffering from great deflation, which will leave Germany even more on the hook. But Germans believe they are the virtuous ones.

What makes this so challenging for investors?
The EU has 17 parliaments. Investors have to now be experts in small-country coalition politics. The European Central Bank sees itself as the guardian of monetary orthodoxy, independent of governments’ politics. But it may just get swept aside.

What does that mean – the ECB getting swept aside?
The ECB is avoiding any hint of a possible Greek default because a default means the ECB would use up all of its capital, forcing it to go back hat-in-hand to member governments for a recap – at which point it risks losing some of that independence.

What about the US?
The relationship between China and America is unsustainable. China is too big to maintain these persistent, huge current-account surpluses without the US resorting to protectionism. Protectionism is becoming an acceptable policy response in the US. That’s very bad news for world trade and global growth.
China feels it's the virtuous party because it is the surplus country. But if the US adjusts by exporting inflation, that will lead to unemployment in China and protectionist policy in America. So China needs to allow manufacturing to return to the US.
The US obviously has a fissure in its political system, but there are fewer players to consider in how policy is managed. The Federal Reserve coordinates with the Treasury to try to ignite growth, unlike relations between the ECB and member state finance ministries. And the US has labour flexibility.

What’s changed in your portfolio?
We have added equities for the UK, EU, globally. We have not yet increased our weighting for emerging market equities. We need a few more months until it is clear that central banks in China, India and other countries shift to an easier monetary stance.
I don’t expect a hard landing in China so the central bank hasn’t been in a hurry to cut interest rates. Inflation is there, but it’s looking a little better, at 6.1% - but nor is it falling rapidly. India’s in a similar situation, so it will take four or five months until these countries ease policy. That will create a stimulus for emerging-market equities. Right now, however, this segment seems to offer cheap valuations. I think we’re through the worst of emerging-market corporate earnings downgrades.

What asset class should come out of this period in the best shape?
Over the longer term, equities of all kinds look cheap, especially in the US. If you can handle the volatility and think out five-to-10 years, equity investors will do well. But markets will be very choppy for the next year.

Are you adding such stocks now?
I am reducing volatility in my portfolio. But if you can accept risk, big-cap stocks in the West remain well placed to navigate through this crisis. Companies there have strong balance sheets and can raise financing outside of the banking system, they can shift production globally, and they can provide investors with higher yields than good-quality names in the bond market.

What degree of risk are you taking?
We’re now 30% equities in our multi-asset portfolios. We’re waiting on Europe to see what’s next. Eventually that weighting will go up, perhaps to 50%, but it’s a question of timing: we’ve become more short-term because the risk of policy failure is so much greater. There are widespread fears of a banking-sector crash and depositors taking flight.

What about fixed income?
Government bonds offer poor value, but they do remain well bid. There may be setbacks but I don’t see 10-year US Treasuries or German bunds going to 5% yields. This paper remains backed by central banks as long as they continue to seek ways to stimulate economic growth. It will be two or three years before there’s enough retrenchment on household balance sheets in the US for the Fed to back off. After that, though, things could get pretty awful for bondholders.

You own gold as well. What role does it play right now?
Gold is behaving like a currency. If the renminbi was floated, there’d be no bid for gold. It’s a substitute for Western banks printing paper money. The setback in gold prices in September hit our portfolio, but we’re not changing our stance. We just see more money-printing. The gold price got a little overextended, which allowed some investors to take profits. Over the longer term, the resumption of growth in the West and a rise in real bond yields will kill gold.

Is gold a safe haven?
There are no safe havens. Gold isn’t one. You need to look at the behaviour of asset classes and know that all certainties in investing are going to be challenged because policymakers are producing peculiar outcomes.