Better fundamentals essential for rally to beat fragile recovery

The economic environment appears reasonably benign in the near term given the upswing in the industrial cycle, relatively subdued core inflation pressures and expectation that central banks will keep interest rates at their current ultra-low levels. The recovery, however, remains fragile, which gives us less conviction to take large structural asset allocation positions.

Risk assets have moved higher on the back of improving macro and micro newsflow and a squeeze on short positions. We see few valuation extremes following the recent gains, implying an improvement in fundamentals is important for the rally to continue. Regionally, emerging markets and the Asia Pacific region resumed outperformance. The UK appears to be moving quickly towards fiscal tightening. In contrast to the US dollar, sterling does not have reserve currency status and has shown itself vulnerable to fears surrounding the UK funding position. 2010 will bring some domestic headwinds, wi...