Investors should beware of the ob-vious. Investment success is ach-ieved by positioning a portfolio to be overweight in markets or asset classes that are likely to outperform. With so many people analysing markets, the forecasting of what will do well is no simple task. The obvious problems such as Asian crisis, global recession fears and Japanese deflation, are quickly discounted by the stock markets and hence knowledge of the obvious cannot lead to market out-performance. Asia was actually a 'buy' in September just as the newspapers were full of the 'Asian crisis'. In the present period of high volatility, investors should have nerve and look longer term across the speculators gyrations.

First examine what has happened so far. Markets have produced a 'relief rally' as the doomsday fears of September have not yet materialised. Action by the Federal Reserve to cut interest rates coupled with an Asian belief that the worst may be over allowed markets to recover part of their third quarter decline. The root problems of slower growth and the Asian crisis have not gone away, but rather are viewed as less serious having been overly discounted by the market. Corporate profit forecasts are still coming down in almost all areas of the world, but these cuts are no longer shocking. Global equity markets are required to balance the positive effects coming from a lower interest rate environment with the negative effects of slower growth. Over a 12 month horizon, we expect markets to be higher, but there can be a large amount of volatility within that time period. The bond markets will benefit from the declining interest rate environment but the effect will be muted by the steeping of the yield curve.

The global economic outlook is for slow growth but not a recession. The action by the Federal Reserve to cut interest rates without the US slowing or US inflation rising has indicated that the Fed wants to act in anticipation and that it is observing global influences. This action by the Fed has placed greater pressure on the world's central banks to assist in averting a global slowdown.

Eventually the European Central Bank (ECB) will cut rates as the evidence for a European slowing be-comes more concrete. Unfortunate statements by European politicians have strengthened the resolve of the new ECB to show their independence hence delaying these cuts. Europe needs to avoid an overly strong euro especially considering the fragile nature of the economies providing further fundamental reasoning for monetary easing. The US is unlikely to slip into recession in 1999 but profits will be depressed at least through the first half of the year. Asia is recovering slowly with the economy helped by much lower interest rates but there are still fundamental problems.

The conclusion is to hold your nerve, invest in equities for a 12-month gain. Bonds will also produce positive returns. Use any cash for tactical buy in the fear correction when the 'cannons are sounding'.

Bruce Albrecht is director at Rothschild Asset Management in London

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