In 1998, economic growth in the industrialised world will decelerate to 2.5% due to the effects of the Asian crisis. However, assuming that the financial markets in East Asia and Japan stabilise, the main impact of the Asian flu will be that the inflation outlook improves. This in addition to strong productivity growth has given the Fed further scope to adopt a wait and see" policy. This will limit possible interest rate rises in core Europe prior to the introduction of the Euro. The overall situation suggests that bond prices could initially rise further, however, the robust economies in America and Europe limit the upward potential. Generally we feel that the dollar has further upside potential.

The financial crisis in East Asia will pose a risk to corporate profits in 1998, but the equity valuation has been supported by declining bond yields. Interest rates are unlikely to pose much of a threat in the short term and in the light of global economic trends, the medium-term outlook for equities is positive.

Within our global balanced model portfolio we have an overweight in equities, especially in Continental Europe. The strength of the US dollar, low inflation, low interest rates and high restructuring potential will generate double-digit earnings growth in Europe this year. In contrast, we are slightly underweight in US equities, because US companies will suffer more than their European competitors from the Asian flu. In view of the financial crisis in East Asia, Japanese growth prospects and corporate profit expectations have dropped substantially. For this reason we remain underweight in Japanese equities.

With regard to bonds, US Treasur-ies are the most attractive from a Deutschmark perspective. Growth is set to slow down in the US this year. We believe that the US dollar has further potential and that US bond yields are more attractive than those in Germany. UK Gilts are appealing on a local basis. We are slightly underweight in continental European bonds within our global bond portfolio because of the higher growth momentum in Europe and fears about a weak Euro.

Bernhard Biehler is a strategist with Metzler Investment in Frankfurt"