The bad news is already well recognised: an endless Japanese de-pression colliding with a surprisingly nasty South East Asian crisis. The good news, however, is less well publicised. It is that both heavyweights of the world economy, North America and western Europe, accounting together for two-thirds of world GDP, are alive and well, and moving along at a 3% annual clip, with no in-flation.

Which of these two groups of countries is going to draw the other into their camp? Can we really envision Asian flu spreading to the US and Europe? We don't believe this, for three reasons.

q First, Japan is really the key here, and we feel the Japanese government is finally addressing the problem. By emphasising that solving the banking crisis is its priority, the government hinted that the post bubble problems could be solved only through asset reflation. We will know how quickly things improve by just monitoring banking stock prices. On this front, the latest news is rather reassuring.

q The Asian crisis itself is really confined to five small countries, with the exception of Korea. These countries had been enjoying a dramatic growth upsurge over the past 15 years, but the trend is not going to be jeopardised by the present turmoil. Export growth will resume with a vengeance, and the people will accept the necessary sacrifices. Given their asset price deflation, western countries will rush to participate in new ventures and increase their share of these still promising markets.

q The crisis has come at a time when the US was worried by renewed inflation fears. Asian deflation helps a lot. Thus, a congruence of goals seems to shape up between the two above-quoted group of countries, and the IMF and World Bank have proven quick and efficient rescuers..

Although we can't dismiss additional trmoil in the short term, we remain cautiously optimistic for 1998. In terms of asset allocation, we retain a neutral weight in equities, and a slight underweight and below benchmark duration on bonds, with cash taking up the slack. Within equities, we still favour Euroland against the UK and US, and stick to neutral on Japan. Within Japan, we would overweight banks and the financial sector. If Japan gets out of the doldrums, gold mines should follow suit.

François Xavier Chevallier is with BNP Asset Management in Paris

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