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Slowdown as US economy runs out of steam

If there is one single factor which concerns us about the state of the global markets, it is the weight of evidence which suggests that US economic activity is slowing down and that the dollar looks badly positioned against European currencies. This is a key factor behind our investment strategy which is being factored into our asset allocation policy.

Unlike some of the other Jeremiahs in this industry, we are not predicting any kind of precipitous market correction, we believe, however, that the US economy is rapidly running out of stream. Our research suggests that GNP growth is set to slow down from the first quarter 5% to 2% in the second half of the year. Domestic inventories remain high at a time when the US is coming under increasing pressure from cheaper imports, particularly from the Far East.

The advent of Euro, too, will tighten the pressure on the dollar - especially if the Bundesbank increases interest rates in the second half of the year. Have no doubt, the Euro is going to be a reserve currency to rival the dollar. And this could happen a lot quicker than many people think. As far as the asset management industry is concerned, the introduction of the Euro will have a profound impact on investment strategy in that managers will increasingly regard Europe as a single trading bloc. Funds have historically invested in Europe on a country by country basis. With the advent if the Euro, fund managers are increasingly looking at any investment in Europe on a sector basis: The entire concept of assessing the relative merits of weightings in individual countries has been rendered redundant by the emergence of Europe as one single trading bloc.

The implications of this are enormous for investors in the equity markets. As the borders between all the different EU countries fade away, large cap companies will lose their national identities, regarded simply as constituents of the enlarged Euro market. Mid and small cap companies, however, will remain national players. Will this sector develop into an orphan class" of neglected assets?

And how will this impact on the rapid growth on pension fund growth we are seeing in Europe - particularly in defined contributions?

These then are some of the factors which are currently influencing our asset allocation policy.

Robert Parker is CEO of Credit Suisse Asset Management in London"

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