The impact of Asia's financial crisis last year is slowly beginning to show up in the real economy as some of the major emerging markets in Asia have slipped into recession. Japan was hit particularly hard by the upheaval. The US and Europe were both affected less by Asian contagion, instead falling interest rates actually outweighed the negative crisis effects.

The global decline in long-term interest rates came to a halt in recent weeks. Interest rates on some European bond markets dropped to levels never seen before. Bond yields of just 2.5% in Switzerland and less than 5% in Germany are justified in fundamental terms only if their economies stagnate and inflation hovers around zero. The crisis in Asia will brake economic growth in western industrial countries only temporarily, rather than choke it off completely. The emerging upturn in Europe will force European bond markets to revise their pessimistic view of the future course of the economy. Japanese bond yields of around 1.5% will also have to rise in the medium term. We are somewhat more positive on the American bond market.

Stock markets climbed to new highs in the wake of falling interest rates. Despite the high valuations, we are still positive concerning equities since there are no attractive investment alternatives. We remain strategically overweighted in Europe as restructuring is becoming more and more prevalent and earnings growth is still high. The outlook in the US is deteriorating since corporate earnings growth is losing momentum. We will remain underweighted in Japan as long as the risk of recession lingers and politicians are unable to pass reforms. The Swiss franc weakened somewhat in recent weeks, reflecting the National Bank's willingness to inject plenty of liquidity into the money market. Improving economies in Europe have lifted confidence in the euro. Although there is still a lot of uncertainty, we firmly believe the ECB will do all it can to ensure the euro is a respectable successor to the DM. The US dollar is still benefiting from a substantial yield advantage but this will change in the mid-term.

Alex Hinder is chief economist of the Vontobel Group and member of the executive committee of Vontobel Asset Management in Zurich