Value has been out of favour in the irrationally exuberant" markets over the last 18 months but our view remains resolutely cautious. We are concerned that financial asset prices are too high to be supported by current values despite what many consider to be the golden scenario of low inflation and high dividend growth.

We are not alone in our concerns. The chairman of the Federal Reserve Board, Alan Greenspan, recently took the unusual step of making public comments on the level of equity markets. He asked: how do we know when irrational exuberance has un-duly escalated asset values which then become subject to unexpected and prolonged contractions as they have in Japan over the last decade?"

Many commentators have surmised that we at PDFM expect, and need, a market crash both sides of the Atlant-ic. This is not necessarily the case. What we do expect, and would benefit from, is a shift in the relative ratings of 'growth' and 'value' stocks. A clos-er look at the UK equity market re-veals that most sectors have underperformed whilst just a few, notably fin-ancials and pharmaceuticals, have forged ahead. These growth stocks look likely to run out of steam leaving value stocks to re-emerge as winners. Also political pressures could have cost implications for companies that have not been fully recognised.

Turning to bond markets, they have shown greater caution over the economic outlook and current bond yields (ex Japan) provide no support for equities. Signs of stronger world growth do not offer a promising outlook, but al-though we are also cautious on the markets, the relationship between bonds and equities makes bonds, and in particular index-linked gilts, offer better relative value.

In the UK, property is still the most attractive asset class - offering high initial yields with indications of a pick-up in rental growth. There is much strong competition to buy and, consequently, a hardening of prices paid.

Stepping back from the short-term movements in the market and looking at current events in their long-term context, we see that fluctuations in market values can be very wide and can persist for some time. Our ap-proach is to remain steadfast in the be-lief that we are acting in our clients' best interests by maintaining a sensible long-term investment strategy. Paul Yates is a director of PDFM."

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