Equities still have upside potential

After their year-end rally, equity markets still have some upside potential. We continue to recommend an overweight on equities relative to bonds and cash. The dollar trend remains a major threat, so we advise hedging. Our central scenario of a modest rise in bond yields in a low inflation environment is favourable to equities. Accelerating economic growth is translating into a much improved profit outlook (between 10% and 15% profit growth expected in 2004) with a noticeable improvement in the quality of estimates. The valuation level relative to bonds is still attractive and, in absol...