At Putnam, global asset allocation portfolios are constructed by combining global vision with a quantitative approach to markets. Global asset allocation decisions are based on the output of quantitative market forecasting tools and fundamental input from Putnam's Capital Markets Forum, a monthly meeting of our senior investment professionals that covers the full spectrum of asset classes. The forum critiques the output of the quantitative models and prevailing consensus views to develop broad-based investment themes.

The forum's current view is that, over the next six to 12 months:

q US stocks will rise moderately, outperforming a stable US bond market by a margin consistent with historical averages;

q non-US stocks will outperform US stocks in local currency terms; and

q non-US bonds will underperform US bonds.

More specifically, based on our quantitative valuation and fundamental economic analyses, we believe that continental European and emerging markets stocks represent the most attractive opportunities in the global capital markets. As a result, we are overweight in these markets at the expense of developed-market bonds.

The recent high volatility of the Japanese stock market indicates a corresponding high level of uncertainty regarding that country's economic and corporate earnings outlook. We therefore are currently underweighting Japanese stocks. Japanese bonds continue to appear extremely overvalued.

In the US, we expect above-trend growth, low inflation, and benign interest rates. Stocks and bonds are both at approximately fair value. In this climate, we remain underweight in stocks and maintain a neutral exposure to bonds. We do not anticipate a top performance from US equities this year. However, we expect US bonds to outperform most other major bond markets over the next three to six months. We also expect the Deutschmark to continue weakening against the dollar over the short term, but to end the year stronger. Sterling, performing well over the past few months, is approximately fairly valued at current levels and should remain stable over the next six months.

William Landes and William Zieff are co-chief investment officers of global asset allocation at Putnam Investments in Boston

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