Greater appetite for risk has pushed government bond yields back up to more attractive levels, particularly in Europe and the United Kingdom, but we still view them mainly as an economic hedge.

The current level of spreads and strong corporate (ex-financial) balance sheets - vs. earnings concerns - make investment-grade credit an appealing alternative to equities.

Although spreads have tightened sharply from their crisis highs, there is still value in the high-yield area, warranting a selective and diversified exposure.

We also continue to find emerging debt attractive from a yield perspective, with the added benefit of potential currency appreciation when labeled in local currency.

Equities

We maintain an underweight exposure to equities, largely due to earnings headwinds. We expect downward revisions to continue and shift more to non-financial sectors. In our scenario, earnings will not bottom out until mid-2009. This will likely cap equity market performance through the end of this year.

We are making no change to our regional stance, favoring selective emerging markets - Brazil, Russia, Korea, and Taiwan - or to our preference for large-cap visible/resilient growth stories.

Alternatives

We see some near-term risk to the oil price - with debate on speculation fuelling volatility - but the inelasticity of demand and supply argues for a sustainable high price. As believers in the "super cycle theory" (structurally strong supply-demand dynamics), we are not changing our overall commodities exposure. We do, however, currently favor the more defensive gold segment.

Within hedge funds, our preference currently goes to strategies that exhibit a low correlation to equity markets.

Currencies

We are maintaining our exposure to the emerging currencies de-pegging story as well as our hedge of direct exposure to the US dollar.