The probability that the Fed will raise rates has increased due to unexpectedly strong growth momentum in the US. Not surprisingly, this is to some extent reflected in current US bond prices. This plus decreasing earnings momentum and a stronger dollar put a drag on the US equity market. European bonds will hardly be able to evade rising US interest rates. As a result, short- to medium- term perspectives for equity markets have somewhat deteriorated. Our equities remain, therefore, only slightly overweighted against bonds in our global balanced model portfolio.

In an international context, European equities are still attractive. Nonetheless, European equity markets will suffer from a possible correction in the US equity market, but to a lesser extent. European growth momentum is, in our view, significantly underestimated. Against the background of an imminent EMU, continental European central banks will continue with an expansive monetary policy, whereas governments will persevere with their efforts to reduce budget deficits. Consequently, this will further weaken European currencies against the US dollar in the medium term. Additionally in the long term continental European equity markets will benefit from greater corporate restructuring potential than Anglo-Saxon countries and from the growing importance of equities as an instrument in private retirement pension schemes. Japan is indeed showing first signs of finding a stable base. However,we still hold an underweight in Japanese equities.

With regard to bonds, Anglo-Saxon markets are relatively the most attractive from a Deutschmark perspective, especially as attractive yields can be achieved there also with short-term maturities. We maintain our underweight position in high yielders”, with the exception of gilts, and an overweight position in the hard currency block. We do, however, assume that the convergence process will resume in a few months. Before this happens and should spreads widen, positions in “high yielders” can again be increased.

Bernard Biehler is a strategist with Metzler Asset Management in Frankfurt.