Lyon (pictured) told investors in his closed-end Personal Assets trust that economic momentum could cool further in 2013 and while central bank policies will ultimately lead to a spike in the cost of goods and services, deflation may come first.
'GDP forecasts have drifted downwards and the burden of lifting the Western world out of its financial morass has fallen on the US and Germany, despite their growing at well below their historic rates. Our caution on the UK has been justified and of the major developed nations only Italy and Spain are expected to fare worse in 2013,' AAA-rated Lyon explained.
'While we are convinced the most obvious bull market at the moment - the one in central bank balance sheets - must ultimately lead to inflation, a 'Little Ice Age' of deflation may still come first,' he added.
According to his trust's half-year report covering the six months to the end of October, Lyon maintained a high liquidity buffer in his portfolio, roughly 51%, over the stretch, reflecting his cautious stance and believes that defensive blue chips also became expensive over this period because income-starved investors piled into the stock market despite falling growth forecasts leading to lower earnings forecasts.
But while Lyon is certain of inflation, he acknowledged that asset allocation timing can prove difficult and has reacted accordingly.
He explained: 'Since timing asset allocation for these outcomes is impossible, we have tried to prepare for both by building the portfolio on four 'pillars': blue chip equities, index-linked bonds, gold bullion (including gold mining shares) and cash.'