Due the turmoil in the Far East and Russia, the risk for the economic outlook in Europe and the US is clearly at the downside. In contrast to the consensus view held at the beginning of the year, it has to be taken into consideration that both growth in the US and Europe will be dampened by developments in the rest of the world. In the course of the year growth forecasts for Asia have repeatedly been adjusted downward. Given its weight in the world economy, the downward revision of growth for the region has taken its toll on the prospect for world trade this year and next.

The Russian economy as such has not a high weight in the world economy. But if the economic downturn in Russia starts to filter through in the East European countries, which can be ex-pected, the prospects for German ex- ports will deteriorate, making the overall outlook for Germany look even bleaker, given the fact that the rebound in dom-estic spending has so far been meagre and not robust enough to compensate for a fall off in foreign demand.

In addition, scenarios can be thought of, in which the final impact on economic growth will be much higher. An important risk for world economic growth, difficult to quantify, is that the sharp fall in equity prices on Wall Street will change the positive mood of consumers. So far this year US consumers have already spent most of their income for 1998, making a fall in consumption growth in the third and fourth quarter likely. Additional negative wealth effects could make the decline much stronger. In combination with the negative impact of world trade on economic growth, this can push growth much lower than currently thought. Another risk for the US economy is Latin America. Problems in the region will affect US exports.

Although we still stick to a basic scenario in which economic growth in the US and Europe will fall, but will remain close to the long term growth path and in which the crises in Russia and Asia will not further intensify, we certainly take into consideration a much more negative outlook for the world economy in our investment policy.

As far as the basic scenario is concern-ed , we feel that, given the recent price fall of equities, market valuations have become attractive again both for the US and for Europe. For the Japan and the rest of the Far East uncertainty re-mains too large to speak of attractive levels of valuation.

Overall in our portfolios we favour fixed income investments over equity. This policy reflects the strong probability we attach to the negative scenario materializing. Within our equity portfolios, we overweight European stocks. The European corporate sector is in a good position to increase profits over the next few years with the continental European economies not yet at the end of the business cycle and still a lot of room to further improve returns on equity. In addition, the earnings outlook for the European corporate sector seems much less vulnerable than in the US and the Far East.

Hans Peters is head of fixed income at Fortis Investments in Utrecht

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