As we are experiencing the second wave of turbulence in Asia, the big question is the effect will be on the European and American markets.

Now China and Japan are also suffering badly. Japan is dipping into a recession due to weak domestic demand, as the unemployment rate rises. Although the export sector is doing reasonably well, more and more people think, that a further weakening of the yen is necessary for a stronger Japanese economy. The yen has fallen now substantially relative to the doller, but the Japanese economy is still not improving. And even China, that managed to keep its currency stable during the currency turmoil last year, might become less determined to support its yuan as the export sector is severely hurt by the weakening of the yen we remain strongly underweighted here.

The major effect in the western markets has been the alleviation of fear for higher interest rates. The underlying trend in the western economies has remained strong.

In the US the possibility of a hike in interest rates limited the upside potential for both the equity and the bond markets. Now the weakness in the export sector is reducing the risk of an overheating US economy. We expect lower bond yields over the next couple of months. Within bond portfolios we overweight the US market. The lower bond yields will lend support to the equity markets, giving them potential to continue to rise.

The European economies continue to gather strength. Consumer demand is rising and capital expenditure remains healthy. After a strong convergence in European bond yields, for the rest of 1998 we will see convergence in the short interest rates. This convergence will create the opportunity for further rate cuts in the peripheral countries. Bond yields will stay low in the European countries, as inflation remains non-existent. The restructuring of the corporate sector clears the way for continued earnings growth. A scenario of strong earnings growth and stable bond yields is ideal for equities. European equities are presently favoured. The sectors, we prefer, deliver steady earnings growth, like life insurers, pharmaceuticals and consumer non-durables.

Bart Zeldenrust is fund manager and Gerard Sirks is head of asset management at F Van Lanschot Bankiers based in Hertogenbosch