Although Asia's debt and currency crisis began a little more than a year ago, the Asian economic recession has really just begun. First quarter GDP figures show contractions of -5.3% in Japan, -3.8% in Korea, -2.0% in Hong Kong, -2.0% in Malaysia and -8.6% in Indonesia.

Japan continues to be a key element in the Asian malaise, and the introduction of the new prime minister is not going to change things much in the short run. Consequently, the Japanese economy will continue to suffer and the yen will stay weak.

This exacerbates the worry over the Chinese renminbi. A devaluation would have a wrenching effect on the already bad levels of sentiment and send the Asian markets and currencies down further. The global economy would feel this as a further deflationary ripple, maybe even a tidal wave. The risks of investing in Asia remain high and underweighting is warranted. However, the Asian debacle has created a classic economists dilemma of good news on the one hand, but bad news on the other for the US stock market. The good news: deflationary pressures are keeping inflation in check. This in spite of unemployment standing at its lowest level in three decades and a buoyant domestic economy. As a consequence, the US Federal Reserve Board has put interest rates on hold allowing valuation levels to remain at the high end of their historical ranges.

The bad news is a sharp downturn in US exports, a growing trade deficit and a manufacturing sector that is slowing significantly. Combined with weakening pricing power, we arrive at a downturn in US corporate profits. While a downturn is already in evidence, it has not yet led to a sentiment change. Altogether these conditions leave us neutral, though mildly optimistic on US stocks and bonds.

European stock markets are undergoing a similar, but more muted reaction to the Asian crisis. It is muted by circumstances that are unique to the European context. European companies are in the early stages of managing themselves to create shareholder value. Unlike the US, there is plenty of room for expansion in profit margins and increasing returns to equity capital. Furthermore, the demographics and low interest rates are creating a culture of equity investors in Europe. As a result, we find European equities attractive. We don't think that interest rates have much further to decline from here so we are neutral on European fixed interest.

As the recent successful privatisation of Telebras suggests, Latin America deserves attention. Valuations look compelling and the economies are as healthy as they have been in a long time. We especially like Brazil and Mexico; global investors should make room in their portfolios for selected issues from these markets.

Edward D Baker is with Alliance Capital in New York