The worst-performing asset classes of recent years could be set for a reversal in fortunes if the Fed resists another round of quantitative easing (QE), according to Robin McDonald, co-manager of the Cazenove Multi-Manager Diversity range.

While some believe the minutes from the latest Federal Reserve policy meeting imply that a large-scale asset-purchasing programme could be on the horizon, the markets are still in the dark about the likelihood of such an event.

McDonald, who thinks the US would be making a big mistake if it does go through with QE3, says a decision not to print money could see the tables turned for investors, with emerging markets and commodities in the doldrums, and UK, European and US equities once again leading the charge. 

"If they reject the ‘printing money’ option and the dollar stabilises, it will create an environment that is not conducive to things like emerging markets and commodities, but it could be hugely bullish for everything else that hasn’t worked well in the last few years," he said. 

McDonald (pictured) added: "We’ve all been taught in the last 10 years that in order for risk assets to do well the dollar must be falling and this needs to change." 

The manager thinks European and Japanese equities stand to benefit in this new world order.

"When you compare them to March 2009, or back in 1983, they are trading at extremely low valuations relative to US equities in historical terms. You could argue the same thing about European equities which are trading back to where they were in March 2009." 

US equities, however, are expensive in relative terms.

"US equities are trading within spitting distance of an all-time high, and if you include dividends – so we’re talking about them in terms of total return – they’re actually at an all-time high." 

Government bonds are also out, says McDonald, because they are so expensive, and emerging markets – controversially given their heavily tipped status in recent years – could be out in the cold with them. 

"That’s a story which has for some time already run its course. We had an emerging markets fund manager in from [a major asset management group] this morning and he was basically singing from exactly the same hymn sheet." 

In the UK, McDonald thinks cyclical companies such as house builders and even those in deeply unloved sectors such as media stand to benefit the most from this new environment. 

"There’s a huge disparity in relative terms within the market. Defensive investments which were in last year have done their job, and now they’re at a record premium." 

"The flipside of that is that cyclical businesses such as house builders and for example some media companies are all at huge discounts to the market – so we’re trying to reposition our portfolios for a change which sees some mean reversion here, with some of the areas people really love reverting and de-rating to the downside." 

McDonald is keen to stress that the outcome of next week’s meeting still hangs in the balance and pressure from various sides could mean QE3 still goes ahead. 

He said: "I don’t think a full money-printing version of QE3 in the conventional balance-sheet expansion sort of way is necessary or desirable, I think it would be counterproductive." 

"What I want to see is him [Ben Bernanke] talk about what they ‘could’ do, but not actually deliver what the market wants – I don’t want to see a freshly minted bond-buying programme."

"But does that mean they won’t do it? Who knows."

McDonald is co-manager of the Cazenove Multi-Manager Diversity range of funds, which includes the £876m Cazenove Multi-Manager Diversity portfolio.