A host of economic data, as well as the performance of the financial markets themselves, point to some slowdown in the global economy.

Comment on this issue has a focus on the US and, in particular, on the US consumer and the housing sector. It is clear that transactions in the US housing market have fallen sharply and there are fears that softening house prices could severely hurt consumer confidence, with knock-on effects on consumer spending and on global demand.

Perhaps in response to such reasoning, global commodity markets have sold off in recent weeks. For example, the generic nearest contract for crude oil on the New York Mercantile Exchange now trades just above $60 per barrel, compared with over $75 in the early part of August. The CRB industrial commodities index, where energy has a 17 percent weighting, stopped rising in May and is now arguably on a downward path.

Leading indicators of economic activity, such as published by the OECD, are now rolling over, though business survey data still tend to point to a slower rate of growth rather than a decline. Although many momentum indicators are giving a negative message, it is also true that they are falling from a high base.

Just 6 months ago, it was very clear that the world economy was growing strongly, as it had been doing since 2002. It has also been clear for some time that higher interest rates would eventually cool things, just as the world's central banks hoped that they would. Now the question is "Do we face a slowdown or the beginnings of a recession?" The IMF's semi-annual report on the global economy has a quite reassuring message.

The baseline global economic outlook, as presented in the September 2006 World Economic Outlook, "...is for a continuation of favorable developments, in both growth and inflation. Under this scenario, corporate earnings growth would remain healthy and default rates low, and EM (emerging market) sovereign finances, if coupled with appropriate policies, should continue to improve".

The IMF does, however, admit that the risks to the global economic outlook have over the last six months tilted to the downside. The risk that inflation has been underestimated is mentioned as is the threat posed by oil prices. A rapid cooling of the US housing market would also have deflationary implications. Elsewhere, the IMF points to the dependence of certain emerging market economies on overseas capital flows.

It seems to us, however, that some of these risks are starting to diminish. Latterly, the inflation data out of the US has been very encouraging.

The US PPI rose just 0.1 percent in August, the same as in the previous month.

The recent fall in oil prices will not only help on the inflation front; it should also help shore up consumer spending power. True, the news from the US housing market has gotten on balance worse in recent weeks.

However, the fall in US bond yields since early-July has now started to boost refinance activity in the housing market.

Perhaps most importantly, with US inflation now starting to behave better and Fed funds at 5.25 percent, the Fed has room to cut interest rates next year if it needs to. All in all, we consider that the IMF's base case - continued growth with continued healthy corporate earnings - has a good chance of playing out and we are basing our investment policy on this assumption.

Earlier in the year, we reduced equity weighting as markets became more fearful of the impact on the global economy of higher energy costs and interest rates. Both these fears have receded in recent weeks. Moreover, we are about to enter a traditionally better time of year for equities, and indeed for financial markets generally. Accordingly, we raised our target allocation to equities by 5 percent this month.

As for currencies we, in principle, recommend hedging foreign exchange exposure back into the domestic currency. However, over the next few months we expect that a continuing favorable news flow from Japan will support some appreciation of the yen.

(Habib F. Faris is managing director of Finavestment. He is based in London.)