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Ian Faulkner, the internal investment manager for the £860m ($1.37bn) Devon County Council pension fund is reasonably optimistic about the market prospects, though the interest rate and changes in the inflation climate may bring bad news longer term.

He says: I think the market is reasonably valued at the moment, but it is not really discounting any bad news. I see it going sideways for quite a long period."

He continues: "If some of the forecasts for a recession in 1998 or 1999 prove to be right then the market could suffer a setback in six to nine months' time."

The market, he says, is mainly being driven by the weight of money going into it underpinned by some recently announced profit upgrades.

"It is led by quite a small number of stocks mainly in the financial, pharmaceutical and oil sectors," he adds.

"We have had a fairly benign environment for the last 18 months and it is only recently with interest rates and the pound going up that the prospects look a little worse."

He sees the prospects for the UK bond market depending, at least partly, on EMU developments.

"The yield on gilts is obviously pretty low at the moment but it is uncertain whether it will go much lower. It is fairly important whether the single currency goes ahead," he says.

Where the UK does not join the single currency at the outset, but the single currency goes ahead successfully then UK gilts will benefit.

"I think that the spread over the eurobonds could narrow, so there is a chance of the gilt market improving over the next 12 to 18 months."

However, he continues: "If the single currency doesn't go ahead then I think there is going to be a lot of turbulence in the markets in Europe and it won't be very clear where gilts are going to end up."

As with other analysts he sees the risk of "overkill" on interest rate policy as one of the major risks.

"If this throws the country into recession, obviously that is not going to be good for equity markets." he says. Problems could be compounded by a lot of profits downgrades, something not currently discounted by the market.

"Either of those events or a combination of the two could hit the market.

"The US market looks to be more overvalued than the UK market and if there is a major correction in the US, the UK will not be immune," he concludes.

At the end of June the fund split its assets 42.9% in UK equities, 4.9% in UK gilts, 6.2% in UK index-linked securities, 4.4% in international bonds, 9.5% in European equities, 2.5% in Japanese equities, 9.3% in Pacific/ emerging markets, 3.9% in property units with the remaining 16.4% held in cash.

John Lappin"

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