Equities

Investors are more bullish on US and UK equity markets and more bearish on Japan, Asia, and euro-zone equities. Asia experienced the biggest decline in sentiment; with the number of investors predicting a rise in Asian equities falling 10%. Asia had been the one bright spot in terms of investor confidence, but results indicate that this region is no longer immune to the impact of a broad economic slowdown. Indications of a pull-back in export demand from China, coupled with domestic inflation concerns, may be the source of investor wariness. Signs that the Hong Kong and Singapore real estate boom is cooling offer further points of caution. US and UK equity market confidence rose 5 percentage points, despite signs that these economies are in or are approaching recession. This may reflect a view that the economic downturn will be short-lived. European and Japanese sentiment has weakened in the face of weak housing sectors, softening employment and wages, and declining investment.

Bonds

Managers have shifted expectations towards higher yields in the US, triggered perhaps by the widespread belief that the bond market rally has gone too far. Although credit problems and economic weakness persist, continued strength in corporate profits and the steady decline in the US dollar argue against current pricing. Concerns about bond insurance appear to have eased, and both the Federal Reserve and US politicians are collaborating to counter economic weakness. Inflation remains a threat, which particularly lends support to yields on the long end of the curve. In Japan, there is some policy uncertainty regarding the change of governor for the central bank, but record-low yields imply an overall bearish view. UK economic data has been mixed and the BoE remains hawkish while inflation persists. Managers are more bullish on European bonds after Trichet softened his hawkish stance and acknowledged threats to economic growth.

Currencies

Investors predict weakness for the euro relative to the US dollar. Consumer and corporate sentiment in the euro-zone has steadily weakened; and while the ECB still struggles to find a dovish tone, it has consistently eased away from its predictable concerns about inflation. The yen is predicted to rise versus the dollar: here broader concerns about the viability of the interest rate carry trade and the return of risk aversion support the Japanese currency. The strength of the UK pound versus the US dollar is in doubt among investors. The primary concern is that the pound is over-extended after 2007, as well as worries that the UK economy is susceptible to the same housing-led downturn experienced by the US.

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