On average, most economic forecasters have been lowering their growth expectations for the crisis-ridden Asian countries month by month. It is clear that China has been severely hit by the crisis and it is estimated that China's GDPgrowth rate- if inventory investments are subtracted - has fallen to 2.5% which is far too low to avoid substantial increases in unemployment. The risk of a devaluation of the Renminbi continues to be a heavy burden for financial markets.

Japan is at the edge of a deflationary development - its GDP and general price levels are sinking. For 10-year government bonds, the market does not pay much more than 1% and des-pite record low interest rates, neither companies nor households are willing to increase their spending. Real interest rates are, considering the decreasing inflation rate, on a rising trend.

The sharp correction which occurred on international stock markets during the recent weeks should not be interpreted as a consequence of a deteriorating earnings outlook for just the corporate sector. The correction is as well an adjustment to higher risk premiums. But are they high enough to pull investors back into the stock and high-yield bond market?

To answer this, we should shift our attention away from emerging markets and focus a bit more on the US, and, to a lesser extent, on Europe. The decisive question is whether the US economy can withstand the emerging markets crisis and keep growing at an annual rate of 2% or more. As long as it continues to show a considerable growth rate, the risk that world economy will be captured in a deflationary spiral is limited.

Given this comparatively optimistic scenario, the current risk premiums are high enough to justify a slight increase of portfolio risk exposure. Our actual investment strategy, however, recommends staying overweight in bonds over stocks. There is a considerable chance that the risk premiums will rise further. The US economy could cool down considerably before emerging market economies have established. We should carefully watch what damage the recent stock market correction did to consumer and business confidence. There are signs that US households are increasing their historically low savings rate. Investment spending of the corporate sector could cool down as well. The rate of capacity utilisation is at a six-year low, and in the second quarter the growth rate of corporate profits reached zero.

The role of the US as 'buyer-of-last-resort' could pass over to Europe. We interpret the sharp depreciation of the dollar against the euro as an indicator that this change of role may well be under way. Whether Europe can withstand these deflationary waves coming from all around, is doubtful. As long as the outlook for the US economy re-mains unclear and the signs of a considerable slowdown continue to dominate; investment risks remain high. We recommend overweight positions in quality bonds.

Witly Hautle is head of investment strategy at Zürcher Kantonalbank in Zurich