Gartmore has recently adopted a more defensive asset allocation strategy.

The strong equity market rallies earlier in the summer were used as an opportunity to reduce exposure in this area. A significant underweight position in equities is now in place - an unusual position for Gartmore. The bond weighting was already below benchmark levels. As a result, the cash weight has increased, as shown in the model portfolio below.

Why has such a defensive position been adopted? After all, the classic conditions for a major equity market correction - either a recession or a very sharp acceleration in inflation - seem unlikely to emerge in any of the major economies, according to Gartmore's own forecasts. The source of concern lies rather with the exceptional strength in many equity indexes up to the summer, which caused some markets to reach very high valuations.

These valuation levels will not in themselves lead to market corrections. They are, however, symptomatic of a conventional wisdom displaying a considerable degree of optimism in the outlook for equities. This suggests markets have reached a stage in which they will be less sensitive to helpful news for equities, as much is already in the price.

What might these less favourable developments be? In the first half of the year, trends in the global economy were in general benign. Economic activity accelerated, but inflation surprised on the downside. The likelihood looking forward is that the growth acceleration persists, but has a greater impact on inflation expectations and monetary stances - even if reported inflation remains low. Gartmore expects US and UK interest rates to increase in the next few months, and that a rise in European rates next year will come to be seen as a more realistic possibility. In this environment, bond yields globally are likely to rise.

Gartmore's main bets" at present are between asset classes- rather than within them. Within equities, however, there is now a slight preference for Japan, at the expense of the more highly rated markets in the US and Europe. Within bond portfolios, the preferred markets are the Anglo-Saxon countries, with the favoured currency being the Deutschmark."

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