In the first quarter, we began a gradual reduction of our position in equities and an increase in the share of bonds.

We are now underweighted in equities and overweighted in bonds as compared to international benchmarks. The reasons for this follow.

We are underweighted in the US. We think the market is expensive if valued in the traditional way, but less so if the globalisation” affecting the economy is considered. As international competition keeps pressure on prices, labour costs tend to converge. Meanwhile, funded pension schemes are gaining greater importance as compared to pay-as-you-go schemes.

These factors produce lower inflation - that is, lower interest rates and less pressure on labour costs even at the peak of the cycle. So equity prices can stay above the level considered reasonable according to the historical rules, since financial markets begin to discount the new environment.

On Japan we are heavily underweighted, since the p/e ratio is around 50, while that for US equities is 20. We don’t think earnings will reach that level. Investments are concentrated on companies with good fundamentals, particularly industrial companies that have been able to cope well with international competition.

We are neutral on emerging markets, having increased the weight of Latin America and Eastern Europe and decreased that of Asia. We expect the growth of Asian economies to slow, as a result of the appreciation of their currencies against the US dollar. Opportunities for these countries to grow through price competition will be reduced and it is quite hard for them to compete with goods that have higher added value and are thus less price-sensitive.

We are also neutral on Europe but increased investments in European equities during 1996. Europe is less vulnerable than Japan as far as long-term interest rates are concerned, since European real rates are much higher than Japan’s. It is also less vulnerable than the US with regard to corporate profit forecasts, because recovery is starting in Europe and there is still room for restructuring and deregulation.

We remain underweighted on Italy, but increased our position in April, following the sharp downward correction in equities in February and March. Our expectation is that the progress achieved by the Italian government in reducing its budget deficit below 3% of GDP will have more impact on equities than on bonds. In an environment of fiscal consolidation, low inflation and low interest rates and with the first signs of an economic recovery in the next few months, we think there is room for Italian stocks to rise. “

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