Global business and credit cycles are nothing new to investors. The familiar sequence of recession, recovery, expansion and slowdown plays out over time, influencing interest rates, credit availability, business climate and capital markets. Its a time-honored process, but in practice, no two business and credit cycle pairings are exactly alike. Business and credit cycles tend to be driven by specific but varying factors that accumulate until an economic tipping point is reached, after which the business and credit climates deteriorate.

The liquidity-driven rush into riskier assets that dominated the first quarter faded during the second quarter. The European sovereign debt and banking crisis was once again the primary catalyst, but softer economic data in the US and China also fed negative investor sentiment. Global liquidity suffered following the end of the European Central Banks (ECBs) long-term refinancing operation (LTRO).

An asset manager?s challenge is to preserve and grow the purchasing power of investors? portfolios under a variety of economic conditions. Understanding the breadth of global inflationary or deflationary trends that can occur, and the ways different assets might perform in these environments, is critical to this objective. Based on our research, we have determined that no single asset class can protect investors from inflation. On the contrary, we believe the flexibility and diversification offered by a multi-asset-class strategy is necessary to help weather changing inflation regimes.