World markets have taken the meltdown in Asia in their stride. However, we suspect that in testing old highs, equity markets are being somewhat complacent. Both the US and Europe will feel significant impact from a flood of cheap goods in many sectors where Asia has excess capacity - including chemicals, semiconductors, autos and textiles.
The effect may take some time to become evident, so markets may run ahead in the meantime. However, we advocate continued caution and would be reluctant to dive any deeper into equity markets at current levels, except for aggressive portfolios on a short-term view. An overweight in bonds and alternative investments remains a more prudent strategy.
The US equity market has recovered convincingly, helped by the strength of the bond market. US equities are again fully valued and consequently vulnerable to probable earnings disappointment. Even if the aggressive analyst estimates for 1998 are correct, the market has limited medium-term upward potential on current ratings.
Sectorwise, market leadership has been evident in large-cap defensives and retailing is the only cyclical sector that is performing well. Small-cap issues have lagged badly, but we ex-pect them to regain ground as small-cap earnings momentum is now greater than that of the large-cap multinationals.
The US treasury market has been very firm as investors have undertaken a flight to quality. The November payroll numbers caused it to pause but we believe that yields will fall again into the new year as evidence of a slowing economy builds.
In Europe, bond market performance has also been solid, with some curve flattening. The best opportunities remain in high-yielding intermediate maturities. In addition, Europe is our preferred region for equities. This is supported by strong earnings momentum (15% to 20% annually) as export-led growth internalises and causes consumption to grow. Furthermore, the realignment of European industry is producing a large number of mergers that should prove beneficial to shareholder value.
Japan's economy remains extremely weak, and its equity market has be-come extremely volatile and po-larised. Some multinationals are close to their recent highs, but the OTC index of second-line, mainly domestic, companies is 30% below its lows of 1992 and 1995. We remain ex-tremely wary.
In the rest of Asia, IMF intervention in South Korea, Thailand and In-donesia should result in more open, market-oriented economies and better allocation of investment resourc-es. However, while value is undoubtedly appearing, it will be sometime before these economies return to a balanced growth track and we view the region with caution.
Latin currencies and markets in-evitably suffered after the turbulence in Asia. The fundamentals relating to growth rates and inflation remain at-tractive. However, we can only expect strong performance from Latin America provided Wall Street ad-vances and Asian currency turbulence subsides. Short-term, our favoured markets are Brazil, Mexico and Venezuela.
Mark Richardson is chief executive officer and chief investment officer of Chase Asset Management.