The stockmarket corrections have reversed gains made in October but our view of economic fundamentals remains unchanged. Indeed, the slowdown in the Far East enhances the steady growth/low-inflation case for the West.
Exporting companies in the West will find life more competitive but cheaper goods from the Far East will allow retailers to increase margins without increasing prices.
The downside risk to growth has increased and the upside risk to inflation reduced, increasing the possibility of earnings-per-share downgrades, particularly in manufacturing sectors.
The risk to the Goldilocks scenario has shifted from a possibility of slightly too hot to turning out slightly too cool.
Liquidity will remain supportive of financial assets and, although global equity valuations reflect the prospect of low inflation, bond yields do not. A lower level of bond yields should be established as econ-omic growth decelerates.
UK gilts are attractive on the European convergence play but European bonds are only attractive for currency appreciation.
Investors were taken aback by the rise in UK interest rates and this hampered the UK market's recovery.
Elsewhere, despite the Bundesbank's recent interest-rate hike, the sound fundamentals in Europe and the expectation that interest rates in this region will remain at historically low levels mean that equity market prospects in this area remain good. In the short term, however, fears over the continuation of competitive devaluations have sent market levels lower.