Although our investment policy committee has been meeting much more frequently than normal, our main concern has not been to 'shoot from the hip' in responding to short term volatility but to seek a clearer understanding of the underlying issues before taking action. The biggest influence on our asset allocation has always come from the 'bottom-up' views of our specialist re-gional fund managers and analysts. And while this does not preclude prompt radical action - for example in making significant cuts in fringe Asian markets starting in the third quarter of 1996 -it does tend to favour considered, incremental changes.

While the Asian crisis may trim 1998 GDP growth rates in North America and Europe, continued above-trend growth in the US and the UK implies further increases in short rates. We find long yields unattractive in both the US and the UK and in recovering Europe see no reason for a big yield discount to US Treasuries. Our bond portfolio is biased towards the short. end of the yield curve.

Within a global equity portfolio we are positive relative to our benchmark on the UK and Europe, negative on Asia and broadly neutral on the US.

In the US we expect earnings growth to slow to 6-8% next year since current valuations are very high. It requires bold assumptions about liquidity flows to arrive at a significant positive return from Wall Street next year. However, such is the strength in depth of the US market that it is still possible to find strong businesses which trade at valuations that are reasonable by international standards.

The UK is not expensive relative to other markets and the technical background remains good. The negative consequences of sterling's strength have been largely concentrated on, if not confined to, small and medium-sized manufacturing companies with an undiversified production base. However as in the US, a deceleration in growth can be expected over the next couple of years, and after a honeymoon period the new government is being regarded with some ambivalence by business especially in view of its stealthy but determined attempts to raise tax revenues.

The British government's reserved attitude to European money union is not widely shared in Europe, where even opponents of the scheme seem convinced that it will start on time. If it works, it will certainly bring about huge changes in European investing. For the moment however, markets seem to be driven by more conventional themes such as an accelerating cyclical recovery and the corporate restructuring.

The economic and financial crisis in Asia is largely the result of severe policy misjudgments and will persist and possibly worsen unless some of the most obvious errors are corrected. We would require evidence of a genuine commitment to reform before considering a major reinvestment in the region.

Gareth Howlett is director Baillie Gifford Overseas Limited in Edinburgh

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