In the past months, moderate world economic growth and a low inflation and interest rate environment have been propitious for an asset allocation favouring equities over bonds and cash.

Although the times of monetary expansion are over and interest rates are trending higher, the rise is modest and will remain so in the absence of strong inflationary pressures. Even in the late cycle countries, the US and UK, there is scant evidence that prices are accelerating fast.

Nonetheless, both the Fed and the Bank of England have felt it necessary to get ahead of the curve by increasing interest rates. The latest economic figures in the US, in particular, show that inflation is still not a problem, with labour cost indicators stable and only small increases in both consumer and wholesale prices. This should relieve investor worries over an excessive tightening of monetary policy. In fact, we do not expect another Fed hike until the end of this year or early next.

Strategically we have remained overweight in equities over bonds in our balanced funds. We have currently a 57% weight in equity markets versus a 43% weight in bonds. The environment for bonds remains favourable, but we think bond markets have little room for capital gains.

On the equity side we are still underweight the US. The market has continued to be underpinned by the past decreases in interest rates and a generally good corporate earnings picture. Nonetheless, we think earnings mo-mentum is set to slow further, especially if, as predicted, the economy eases in the latter half of the year. The sustained strength of the dollar could have a dampening effect on profits.

Our tilt is towards Europe and Asia. Our overweight in Asia has been concentrated mainly in Singapore and Japan. In Japan, where we are currently modestly overweight, we ex-pect more negative news on the economic front and possible earnings disappointments, especially from dom-estic-oriented companies. However, we see this as a shorter-term phenomenon. The upside potential is greater for a turnaround once the pace of economic growth accelerates either later this year or early in 1998. Valuations have also become more attractive in historical terms and particularly relative to bonds and cash.

In Europe, our focus is on cyclical markets, mainly Germany, Switzerland, Sweden and Finland. The stronger US dollar and forecast economic improvement, has considerably enhanced the earnings outlook in these markets. To take advantage of improved valuations and sound economic expansion in Spain, we shifted some of our funds out of Germany and Switzerland to Spanish equities.

As to bonds, we have moved back in-to Canada to benchmark level from un-derweight, bringing our North Amer-ican exposure to neutral. We are maintaining our neutral position in the US.

Despite the low levels of yields in Japan, we are benchmark- and duration-neutral. We see little likelihood of yields rising as economic recovery remains patchy at best. However, we forecast a bout of yen weakness.

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