In January, the MSCI World index declined 4.2% on concerns that tougher regulations for US banks could impair growth. Greece's debt situation sparked concerns over the ability of other countries to meet their repayment obligations. Given record unemployment, subdued consumption and high government indebtedness, especially in developed markets, the headwinds to a sustainable economic recovery remain. Besides, there is ongoing uncertainty about potential changes to the regulatory framework for the banking sector.

Despite concerns that a strengthening economic recovery may fuel price increases, inflation should remain at manageable levels, especially in the developed markets given excess capacity and elevated levels of unemployment. As such, interest rates should remain low in general.

Emerging market equities displayed some turbulence during the month, owing to investor's concerns that central banks may accelerate the pace of monetary tightening. Following record stimulus pump-priming, governments in emerging markets are likely to continue to fine-tune measures to prevent excess liquidity and to keep inflation in check.

Equity valuation arguments explain our preference for defensive sectors over financials and cyclicals. At a regional level within emerging markets, we maintain our positive stance on Latin America as fundamentals remain supportive. We remain positive on corporate bonds as the current yield spread levels are still attractive relative to history and relative to the yields offered by government bonds. Within currencies, in the short term we have dropped our moderately negative position of the GBP versus the EUR as Greece's fiscal difficulties create uncertainty for the EUR.

• The sustainability of an economic rebound is unsure. Improvements were seen in many areas, but unemployment is still high and consumption remains subdued. The risks for US corporations to deliver top-line growth are generally skewed to the downside, particularly given the very optimistic estimates for 2010 earnings. Therefore, we recommend maintaining a moderately cautious view on equities for the US and elsewhere relative to cash.

• We expect economic growth to remain below trend for the UK and the Eurozone, as headwinds remain, such as high unemployment and weak consumption. Current prices may reflect an overly optimistic level of future earnings growth for 2010. As such, the elevated risk of further price correction makes European equities appear less attractive than other developed markets. Balancing out the support from low interest rates and earnings risks, we recommend a moderately cautious position on equities versus cash.

• While there is evidence of a recovery in manufacturing and industrial activity in Japan, similar improvements have yet to materialise in the domestic economy. Consumer spending remains weak and unemployment is still above the 5% mark, which is weighing on consumption and prices. Therefore, we have a moderately cautious view on the asset class, and maintain our underweight position versus cash, while we expect Japan to perform in line with other developed markets.

• While we maintain our preference for Latin American equities over Emerging Asia, we acknowledge that the valuation gap is not as wide as it was. Therefore, we have decided to take some profits. In addition, we recommend a moderately overweight position in Turkish equities, which compares favourably on valuation grounds relative to other emerging markets, as well as having an encouraging outlook for the maintenance of earnings growth.

• The outlook for the Asia-ex Japan economy remains positive. That said, there is growing concern of earlier monetary tightening. Valuations have returned to levels consistent with the first quarter of 2007 but share prices largely reflect the positive news. We believe that company earnings vulnerable to disappointments given overly optimistic EPS forecasts. We therefore maintain a moderately underweight allocation to Asia ex-Japan equities versus cash given the risks for earnings growth to disappoint.

• China started the tightening cycle by announcing a RRR hike by 25bps on January 12. With an earlier than expected tightening, the near-term outlook has clearly become tougher. However, beyond the next few months, the market looks better as the Chinese economy is now on a stronger foundation with lower risk of run-away inflation. While inflation is the near-term the risk, the unwind of liquidity & low rates will become a bigger risk as the year progresses.

• Supply and demand dynamics are slowly improving as are global growth prospects. But the overall level of economic activity is likely to continue to keep oil demand at subdued levels. Therefore, we maintain our target range for oil within the US$60-$80 price range, as subdued demand and ongoing variability in risk appetite are likely to keep the oil price fluctuating within a range.

• The financial crisis and recession have triggered a sharp increase in public debt and raised concerns about sovereign default. However, macroeconomic headwinds and rising risk aversion have kept the demand for US government bonds reasonably buoyant. With capacity utilisation remaining low, we do not expect any inflationary pressures to affect yields in the near term.

• Supply concerns could place pressure on Eurozone bond prices, but these concerns seem to be already largely reflected in bond prices. Greece's significant debt level is likely to generate some volatility in the bond market. Overall, given the low yields offered by government bonds, our preference remains for corporate debt on valuation grounds.

• Following the Greece's downgrade, risk aversion remains the theme and the mood in global credit markets is likely to remain nervous in the short term. Whilst risk premiums in credit markets may stay high, Asian bonds are reasonably valued and should provide returns well ahead of cash and treasuries.

• Abundant market liquidity searching for higher yields, as well as ongoing balance sheet repair in the corporate and financial sectors, mean that investment grade credit remains well supported. Valuations are still historically attractive, company fundamentals are improving and technicals should stay supportive.

• New issuance continues to be met with strong demand. In a longer term context, current yield levels remain appealing. We expect credit returns in 2010 to be attractive, although not as high as for 2009. Default risk will be meaningfully lower over the course of the year. Overall, we reiterate our positive view, although stress that liquidity risks remain.

• Versus the previous month the relative valuation picture is little changed with emerging-market debt continuing to look less attractive relative to high yield corporate debt. Furthermore, investors may display more caution, as several governments are facing increasing challenges to meet their financing needs, as evidenced by the situation in Greece.

• Two competing forces influence our decision to remain neutral on the USD. Slower than expected global growth could influence investors to buy the relatively safe USD, which would be positive. On the other hand a low interest rate environment, which is likely to be in play for the calendar year 2010, is not supportive.

Canadian Dollar (CAD) – Consolidation Is Likely Over Short Term

• The CAD fell 1.6% in January as broad weakness in riskier assets in the second half of the month weighed on the currency. Concerns surrounding the strength of global economic recovery and fears surrounding sovereign credit risk all had a negative impact over the near-term.

Euro (EUR) – Resolution Of Greece Fiscal Issue Will Be A Major Swing Factor In The Short Term

• The resolution of the Greek fiscal difficulties and potentially other countries as well is not clear cut and is likely to continue to be a disruptive factor that will increase volatility. Despite the nascent economic recovery we retain neutral position in view of the short-term factors playing on the EUR.

Sterling (GBP) – Short-Term Direction Of GBP Relative To EUR Unclear

• The long term fundamental position of GBP is little changed since last month and we continue to believe that an underweight position against EUR is justified because of the UK's worse fiscal position. However, in the short term, the direction of the GBP relative to the EUR is unclear given the magnitude of uncertainties impacting the EUR from the Greece debt issue.

Japanese Yen (JPY) – Potential For Volatility Is High

• Early in January, the new finance minister commented on his desire to see the JPY at appropriate levels (i.e. lower) and as such market commentators continue to anticipate some official action. The currency markets may react swiftly to sell the JPY if and when such action occurs. All the time that other low interest rate currencies, particularly USD, continue to look more attractive as carry trade alternatives, the potential for further short-term JPY strength exists.

AUD – China's Demand Slowdown and Fed Tightening Will Be The Headwinds

• The RBA has a tightening bias which preserves favourable interest differential. However, China's demand slowdown and US Fed potential tightening may generate headwinds for the AUD.