Our main investment assumption, of a more balanced world growth, estimated at 2.5% for OECD countries, stems from the economic recoveries expected in Japan and Eur-ope, together with more moderate US expansion.
We expect inflation to remain pretty much under control, despite gradually increasing wage pressures in the US and higher energy costs, while liquidity in the international financial markets may increase at a gradually slower rate in 1997.
Yield curves are expected to flatten, as interest rates rise in most countries in the second half of 1997, making financial markets more volatile. We also predict the dollar will gradually lose its upward momentum.
Bond markets are enjoying a fav-ourable environment, created by tighter fiscal discipline, and Continental European bonds continue to offer the best upside potential. However, we believe that reviving economic growth will mean less expansionary monetary policies on the part of the European and Japanese central banks. We recommend caution about the US and Japanese markets, following the likely end of monetary easing in the US in 1996 and the possibility of an oversupply of bonds in Japan.
Equity markets should now be bolstered by the expected recovery of corporate profits, particularly in Eur-ope and Japan, after benefiting from abundant institutional liquidity and low short-term interest rates. Their recent rises have caused risk premiums to deteriorate, though, they are still positive in most European markets.
We estimate that Europe and the Pa-cific Rim will be overweighted and sev-eral emerging markets have appeal under the strength of underlying growth. The US should be underweighted, as an unfavourable baseline effect will keep 1997 earnings mostly flat.
Jean-Michel Mivelaz is executive vice president of Lombard Odier & Cie in Geneva
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