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High-yield as a new playing field - Equities: overweight Europe - Commodities: patchier prices expected - Real estate: supported by ample liquidity - Currencies: Further softening of US Dollar

We believe the current interest-rate cycle will come to an end in 2006 and AAA yields will remain low. Even so, we think we have left the golden age of the liquidity-driven bull run behind us – for the time being at least – and it will become increasingly difficult to earn more than the coupon in the bond markets. We recommend overweighting equities. Valuations of European stocks still look especially attractive to us. Furthermore we are upbeat as regards high-yield corporate bonds as well as emerging-market bonds.

Fixed-income: high-yield as a new playing field for investors with an appetite for risk
We expect the quest for a yield pick-up to continue to drive institutional investors along the credit curve in the coming year – out of the investment grade and into the so-called high-yield segment. As far as sovereign bonds are concerned, US and Eurozone government bonds now have little to offer. We believe yields will continue to fluctuate around their current levels in the course of the year.

And now the good news: our growth and interest-rate outlook implies a moderately bullish basic scenario for the riskier and higher-yielding fixed-income markets: investment-grade corporate bonds, emerging markets and high-yield. However, given the scant likelihood of a continued spread performance, in the case of corporate bonds we are increasingly focusing our attention on the high-yield segment, i.e. on companies that are rated below BBB. The market for emerging-market bonds still has an attractive risk/reward profile – even though several years of double-digit performances will now put a lid on the upside. The trend is likely to be in the direction of stock picking from the ranks of second-line bonds. Besides public-sector bonds from large emerging-market regions/countries, these could include corporate bonds from the same countries.

Equity strategy: overweight European stocks
Over the coming year we recommend overweighting equities. Valuations of European stocks still look especially attractive to us. We believe this will rekindle interest in value-adding growth in the form of investment rather than in dividend increases and share buyback programmes. We believe the DJ EUROSTOXX50 will reach 3,900 points and the DAX 6,000 by the end of 2006. We regard overweighting in Asia as the second mainstay of our equity strategy. Asia remains the driving force behind the world economy, and expected profits and valuations are likely to lend its equity markets strong support. Our forecast for the US equity market is far more cautious. According to our calculations, the S&P500 is still very highly valued and the risk premium has been moving in a narrow range for almost three years – unlike in Europe.

Commodities: patchier prices expected
Commodities should be able to chart a positive performance next year, as long as global liquidity does not change fundamentally and the world economy does not enter a period of crisis. Besides fundamental factors, sustained investment flows are likely to support the commodity markets. From the risk point of view, diversification in commodities is advisable. However, commodity prices are likely to post a patchier trend next year than they have in 2005.

Real estate: supported by ample liquidity
Real estate is largely uncorrelated with other asset classes and we thus regard it as a particularly good means of diversifying a portfolio. Even though property price risk is mounting worldwide, we believe nominal price declines are unlikely in the light of the continued high liquidity and low bond yields. Within the Eurozone we favour Germany as a location for real estate investment. The property market has calmed down significantly in the UK and Australia during the past 12 months and residential properties are now charting y-o-y price increases that are close to zero. As a result, we now urge greater caution in the Eurozone, especially in Europe’s top performer Spain.

Currencies: Further softening of US Dollar
The gap between monetary policies is likely to normalise next year. This means the market may well tire of the carry issue and be on the lookout for a new theme. And what could be more appropriate than a return to a sharper focus on the structural imbalances? After all, the US current account deficit is well on the way to setting a new record. In such an environment, the winners would be the euro, the Swiss franc, and Asian currencies including the yen. The losers would include the dollar and sterling.