The impact of the South East Asia currencies crisis has yet to be fully assessed. In this context, we study countries showing strong economic imbalances: Brazil, Russia and Poland. The countries whose currencies have devalued about 50% are becoming extremely competitive vis-à-vis western economies. In terms of revising corporate profits, financial analysts have yet to integrate all the consequences of the new economic situation.

Financial markets are leveraged. Because of the banking crisis in Japan, implying low rates and a yen depreciation, borrowings in yen have been realised to finance investments of long-terms US and European assets. US companies are buying back their shares, which increases profit exposure to higher interest rates and economic slowdown. The continual rise in stock markets over the last four years attracted investors who are not fully aware of the risks involved. If the market turns, the fall could be sharp.

We believe the impact of the Asian crisis will be insufficient to slow down the US economy. The Fed should increase its fund rate by 0.25 basis points during the first quarter 1998 and the European monetary authorities should follow suit with a 0.25 basis point hike. Long term rates will follow. We have therefore underweighted our 5-year bonds allocation. We have also underweighted slightly the equity portion at 65% against 70% in our benchmark. We remain extremely cautious about market trends and are ready to reduce sharply our exposure should the south east Asian crisis spill over.

In geographical terms, we overweight Europe and the US. We believe that European monetary policy will result in a strong euro. Investors will gain confidence and will place funds in this region. In terms of equities, we favour continental Europe because contrary to the US, we are at the beginning of an economic cycle. Moreover pension fund retirement systems are about to be set up, and there is a strong restructuring move following the disappearance of foreign exchange risk in the single market.

Eric Marcombes is chief investment officer for fixed income and asset allocation at CPR Gestion in Paris.