Over and above the doubts and uncertainties surrounding the process of EMU, the main question in investors' minds today seems to be when the US, Japanese and German monetary authorities will increase interest rates.

Recent US statistics paint a picture of a less robust economy than expected by investors. Thus, after the last interest rate hike, the Fed might wait for further signs of economic strength before taking more action. In the near future, fears of inflation and a new rise in interest rates will probably not be sufficient to counter the current positive momentum of the US equity market.

In Europe, the economic upturn is slowly gaining momentum. The political climate in 1998 will certainly have a major bearing on the timing of monetary policy moves in Europe. Hence the Bundesbank will probably wait until the end of this summer to raise rates, when news on the German economy should definitely make better reading.

As for the Bank of Japan's position, it is considerably more complicated. Under normal circumstances, it would already have raised its discount rate. But due to the Japanese financial services industry's precarious state, owing to the property crisis and the risk of several bankruptcies as well, rates have been maintained at rock bottom level for quite some time. A substantial rise in Japanese rates is thus postponed until later in the year.

Although economic data points to better prospects for many regions of the world, the possibility that interest rates will rebound quickly and dramatically seems rather limited. Meanwhile, investors will compare returns and find they cannot afford to invest in fixed income placements with such very low historical yields. Against this background we believe equities will continue to be supported by positive fundamentals and high investor liqudity. Consequently we continue to favour equities versus bonds.

Alain Freymond is a member of the institutional investment committee at Pictet & Cie in Geneva

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