It is hard to see what in the short-term could threaten the present market euphoria.

The interest-rate environment remains extremely favourable, owing to the dissipation of expectations of monetary tightening in the US. Corporate earnings are still moving highly positively, especially in Europe where the economic upturn is being confirmed and amplified, in part thanks to the rise in the dollar. And liquidity flows are still very substantial, with a good number of investors trying to get on a moving bus.

The fundamentals may still be highly favourable for equities, but it is difficult to extrapolate recent tendencies for much longer. Traditionally, market upswings normally come to a halt through monetary squeezes. In our view, however, the risk of a re-synchronization of the world's econ-omies, brought about by upturns in Japan and Europe, should not be over-estimated. The US economy is still giving no signs of a revival of inflation. In addition, the fears of an upcoming monetary tightening in Europe, in reaction to an over-rapid appreciation of the USD, seem premature, in view of the constraints increasingly weighing on the Bundesbank in the run-up to EMU.

The conflict between the powerful momentum being shown by the markets in the short term and the risk levels generated by the higher prices has led us to move to a neutral asset allocation between the main asset classes. We find it difficult to envisage increasing our equity positions following the recent rises, while on the other hand the main short-term risk is probably that of pulling out too soon. Within equities, we are overweight in Europe, where corporate earnings still have pleasant surprises in store for investors, and to a lesser extent on Japan, where relative valuation levels are once more attractive, and on Latin America. On the other hand, we are underweight the US, where the earnings risks are on the downside, and on South-East Asia where the restoration of the situation of a country like Thailand is still far from convincing.

We are also neutral on bonds, with a preference for the European and Japanese markets which are still showing the steeper yield curves. As regards currencies, we are maintaining our overweighting of the US$ which still seems to have potential for a rise against the other leading currencies and carries a higher remuneration.

Eric Tazé-Bernard is head of strategy and asset allocation at Indosuez Asset Management in Paris.