According to the outlook we think that generally global growth is going back a little bit compared with last year. We are positive about interest rates both in Europe and in the US, and we are not expecting to see a dramatic increase, and we expect at least that interest rate levels in Europe will continue going back.

We are not too optimistic on the equity markets at least for the first six months of this year. Despite favour-able climates we think that in light of interest rates and inflation that many companies, particularly large caps will not be able to make the earnings that we have seen in the last year. The earnings growth in the US is too optimist-ic, so we are remaining on the cautious side which means that we think that the market, taking today's levels of 10-15%, is overvalued. However both in the US and in Europe, we are more optimistic on small and mid caps.

With Japan, maybe we will see better times but so far we have not seen any dramatic changes and taking into ac-count the investor losses in Japan over the last eight years, we do not foresee any dramatic change in the short term and recovery could be as far away as 2000. That means that we are not too optimistic on any of the emerging markets either which have seen tough times though they are recovering a little bit. Overall for the equity markets, we think it will be a difficult year.

On the other hand, for nominal values like bonds we are rather optimistic. Currency is difficult to predict as always - we think that the euro will have a good start and the dollar will re-main on the levels we have seen.

With regard to the euro we do not intend to change our asset allocation for the time being. The majority of our investments are in G5 countries, and we keep to the current indices and are not yet changing to sectoral allocation because first we would like to see how it works and there is no evidence so far to say there will be a big shift.

With regards to bonds we have al-ready started to shift the national currencies a little bit, converting deutschemarks, French francs and guilders into euros as we think there will be a run to euro bonds and there might be a squeeze in the prices. But this is all we are doing at the moment with re-gard to the introduction of the euro. We are not too pessimistic, as we think there will be a good chance that there will be a successful start which should continue over this coming year.

In the second half we expect there will be a recovery but overall compared with the last year we would be happy if we can have an overall performance on the year on the main equity markets of around 8-10%. The best bond markets of all could be the European markets. Overall, we prefer Europe to the US.

Daniel Gloor, head of asset management at Canton of Zurich

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