Summary

For long-run investors, we believe that current valuations and risk premia offer attractive risk-return prospects. However, with a desire to see greater efforts to restructure the outstanding stock of debt, especially in the United States, in order to prevent problems emerging from new toxic assets in coming years, we are slightly more cautious than we were at lower valuation and wider risk premia levels before the recent sharp rally in markets.

• The global equity market offers an attractive risk-return trade-off for patient investors and a valuation margin of safety to compensate for uncertainty.

• Implied returns for government bonds at such low yield levels are unattractive but we remain comfortable that liquidity injections do not threaten significant inflation in the near term.

• Credit spreads have overshot and are beyond levels warranted by fundamentals for the first time in a generation. Default rates implied in some markets, with very conservative recovery rates in failure, are beyond those experienced in the US during the Great Depression. Credit spreads offer attractive incremental returns, but with some marginal loss of liquidity.

• With banking problems global in nature, the US dollar remains an undervalued reserve currency of choice and should be well supported.