US Equities

Continued support from policy makers to offset credit market problems

Valuations have improved, especially for financials and some cyclicals

Squeeze on corporate margins is forcing employment and investment cuts

Considerable uncertainty over extent of downturn in the housing sector

Market supported by improving valuations and easier monetary policy despite credit concerns

STAY HEAVY

European Ex-UK Equities

Management still focused on restructuring and M&A opportunities

Much of the region did not experience as large a credit boom as other parts of the world

Exports coming under pressure as US and other major trading partners slow

High commodity prices and euro appreciation squeezing corporate margins

The region is vulnerable to weaker earnings and continued credit market problems

STAY LIGHT

UK Equities

Expectations growing of easier monetary policy as inflation finally rolls over

Investors benefiting from good cash flows, dividend yields and share buybacks

Oil and resource companies vulnerable to sharp falls in commodity prices

Concerns remain about the housing market and prospects for bad debts

Although financials and retailers are under pressure, the market is supported by favourable valuations

STAY HEAVY

Japanese Equities

Japan’s financial sector in a stronger position than some other countries

Increasing dividends plus share buybacks are helpful for investors

Companies increasingly face weakening exports to the US and Europe

Domestic economic data suggest lacklustre activity ahead

Valuations of many stocks already reflect a regional slowdown

STAY HEAVY

Pacific Basin Ex-Japan Equities

Infrastructure spending remains a primary driver of many economies

More governments taking action to support domestic activity

High rates of inflation remain a problem in many countries

Earnings at risk from a marked slowdown in OECD or Chinese demand

The region is vulnerable to significant domestic tightening as well as weaker exports

STAY VERY LIGHT

Emerging Market Equities

Current account surpluses protect some countries from credit concerns

Some central banks able to ease monetary policy as inflation remains under control

Valuations still remain rich in many markets

Higher food prices are squeezing consumers and worrying central banks

Valuations are stretched while earnings growth is slowing

STAY VERY LIGHT

International Bonds

STAY HEAVY

US

Growing signs of recession open the way for easier monetary policy

Vulnerable to higher commodity prices feeding through into wage expectations

MOVED TO NEUTRAL within International bonds as Treasuries benefit from lower growth and inflation expectations

Euro-zone

Monetary policy has focused more on inflation risks than growth risks

Concerns that wages could still rise in some countries in response to higher inflation

STAY HEAVY within International bonds

Japan

Solid demand from domestic investors plus limited correlation with other global bond markets

Bank of Japan has been warning about the need to tighten monetary policy

STAY NEUTRAL within International bonds

UK Bonds

STAY NEUTRAL

Gilts

Previous rate rises and credit market turmoil should restrain economic activity

Defensive characteristics of longer dated debt increasingly recognised

After a flight to quality, gilts are vulnerable if investor confidence revives quickly

Longer end of gilt curve vulnerable if interest rates are cut significantly

Within UK bonds, we are now Very Heavy in corporate bonds, Neutral conventional gilts, and Very Light index-linked debt

Corporates

Corporate bond spreads over gilts imply a default rate worse than depression and so extreme value

Downturn in earnings growth would lead to higher corporate bond defaults

Corporate bond valuations are generally attractive although individual issues still require careful examination

Property

STAY LIGHT

UK

Property yields are improving while there is limited new construction overhanging the market

Slower consumer spending and employment cuts in the UK are depressing the outlook for returns

We prefer retail to office property given a more favourable supply/demand balance

Global

Strong occupier demand and limited supply in US and Asian office markets

New vehicles appearing for diversification into global property

Valuations have become stretched in some markets

Sector is vulnerable to withdrawal of global liquidity and higher credit costs

Funds are Heavy in global property. Strong demand and tight supply underpin offices, while consumption supports Asian retail prospects

Cash

Cash is an attractive alternative when corporate earnings and dividends are under considerable pressure

Cash is beneficial for an investor’s portfolio during volatile market conditions

Pressures are growing on central banks to cut interest rates as economies slow

STAY NEUTRAL