Activity data show that the global economy is losing momentum.

For the major OECD economies, when measured in percentage changes on a year-to-year basis, there were several downturns in the leading economic indicators over the past 20 years. However, during that time there were only two recessions (at the beginning of 1990s and again at the start of the current decade).

Perhaps we get a better idea of what is going on if we consider the global economy in terms of the major regional blocs. Outside of some peripheral geography, mainland Europe is not growing and some larger economies such as Germany and Italy may even be contracting. However, the change from last year is not dramatic. In the emerging market world, be it Latin America, Eastern Europe, the Middle East and above all Asia, growth is robust, especially if one thinks of China or India.

The positive trend for emerging markets thus continues while Japan goes through a slowdown phase. However, the strength of the recovery from 2002-2004 was probably overstated as analysts tended to focus on volume data and not enough on the fact that the positive volume trends were driven in large part by falling price levels.

That leaves the United States as the economy where the most uncertainty lies! As an inefficient energy consumer, US demand may be particularly affected by high energy prices. Fiscal policy is not as easy as before and the Federal Reserve Bank is tightening. Recent data points to slowdown, especially on the consumer side, although investment is holding up. We note that previous US recessions occurred at a time when consumer confidence fell sharply from a relatively high level.

Today is different. Not only is consumer confidence not particularly robust in the first place; it is also not weakening in any drastic way. So long as this the case, we side with those who see slowdown in the US, and hence the wor1d economy, rather than recession. However, US and global economic prospects seem to hinge more than usual on what happens 10 the oil prices. Were the oil price to rise much higher, and remain over, for example, $60 per barrel for a significant period, then the odds of a recession in the US and the global economy would increase sharply.

This slowdown, but non-recession, call means that we do not anticipate a self-feeding decline in corporate earnings. On this basis we can justify some commitment to equities. Indeed, the outlook is starting to brighten up. With slowdown comes the reduced prospect of further US interest rate rises. The bond market has already picked up on this. True, the 10 year US bond yield has fallen some 40 basis points over the last month, to around 4.2 percent at the end of April. So far as US interest rates are concerned we may be soon able to “look over the hill”.

“Nevertheless, for the time being our asset allocation is a cautious one. The equity weighing is 25 percent and our Total Return products will have a weighing at the lower end of their allowed range for the time being. Our cash and bond allocation is now 50 percent, with a heavy emphasis on short-dated paper. The balance, i.e. 25 percent is in alternative investments. Here, our focus is on low risk fund-of-hedge-fund vehicles. We also look at our exposure here to provide some protection in the event of near-term weakness in mainstream bond and equity markets.

As for equities, we continue to recommend energy stocks but have cut back on the overweight position. In general, we favor a broad spread across the major industrial sectors and have added Japan to our list of favored areas last month.

On the currencies’ front, we do not at present expect a significant move in US dollar exchange rates. We note, however, that with rising US interest rates an increasing number of commentators are turning more positive on the US currency. Our favored currencies remain the yen and, within Europe, sterling.