Global equity markets were positive in September and they were largely driven by a resurgence in M & A activity and further evidence that an economic recovery has begun in the US. While certain leading economic indicators have either stabilised or improved, the absolute level of activity is still quite depressed from its low levels a year ago. E.g. Japan's exports are still down significantly from a year ago.

While the current valuations of global equity markets are not expensive, they can no longer be considered appealing. As growth is expected to be anaemic for a while and could be moderate next year, markets appear to have moved ahead of the fundamentals and a correction in equities is possible. Under such a scenario, investing in defensive sectors that offer relatively attractive values and yield may be a preferable strategy. At a regional level Latin American equities, that have so far lagged the market rally, have the potential to outperform emerging Asia.

We continue to maintain a positive stance on corporate bonds. Given the strong performance this year, valuations are now less appealing, but still attractive relative to the very low levels of yield offered by government bonds.

Within currencies, we maintain a moderate negative view on the GBP relative to EUR, due to the UK's deteriorating public sector finances. And the Bank of England noted that the country's CPI remained "surprisingly high". As such, this is a further reason to be negative on the GBP as inflation would affect the real yield on UK assets.

• A sustainable pick up in top line growth is yet to materialise, whilst the risk of negative surprises from optimistic forecasts remain elevated. Given the rising risks for a correction, we continue to prefer the relative safety of global healthcare and telecommunication services relative to more cyclical sectors.

• Rising unemployment rates as well as subdued consumption levels remain the key headwinds to future earnings growth and economic recovery. There is a growing concern that current share prices reflect an overly optimistic level of future growth for 2010. At the regional level, we expect European equities to perform in line with their developed market peers.

• The level of uncertainty regarding Japan's economic outlook for 2009 and 2010 remains high with the unemployment rate at an elevated level and consumption showing limited signs of improvement. Despite the recent decline in valuation levels, Japanese stocks remain less attractive than at the beginning of the year with implied level of earnings growth looking overly optimistic.

• We reiterate our preference for Latin American equities over emerging Asia. Latin America is trading at a discount of 41% against Emerging Asia, whilst the 5 year average discount stands at 5%. There is also more potential for positive economic surprises in Brazil from domestic demand.

• Given the relatively optimistic consensus earnings growth estimates for 2009 and 2010 for Asia ex–Japan companies, we believe there is more potential for negative surprises in the short to medium term and would still recommend a cautious allocation to Asia ex-Japan equity markets on the whole.

• Both Hong Kong and Shanghai markets surged in September. Chinese government has repeatedly stated that measures will be maintained to stimulate the economy. This assurance, combined with reasonable market valuations, suggest medium-term upside for the market. We continue to expect the regions will be among the best equity markets over the coming 12 months.

• Our central scenario remains one of subdued and below-trend growth in 2010 for the major developed economies. Subdued demand and ongoing variability in investors' risk appetite are likely to keep the oil price fluctuating in a range. We reiterate our view of oil trading in the US$50-70 range.

• The Fed continues to emphasise that accommodative policies are likely to stay in place and the target rate is likely to remain low. Overall, we continue to recommend a neutral position in Treasuries relative to cash. However, given the low yields offered by government bonds, we prefer corporate debt.

• Supply concerns could place pressure on Eurozone bond prices, as governments continue to issue record amounts of debt to support the economies. However, these concerns appear to be largely reflected in the bond prices. Within fixed income, our preference remains for corporate debt on valuation grounds.

• The normalisation of credit spreads is broadly complete and it will be difficult for Asian USD government credit spreads to narrow much further. We expect a choppy trading environment and a suggested strategy recommendation is to buy dips in credit.

• Credit conditions have shown improvements and systemic risks are now lower. Valuations are now less appealing, but still attractive relative to the very low levels of yield offered by government bonds. Therefore, we recommend a smaller overweight position relative to earlier in the year.

• Valuations are closer to fair value. However, with an option-adjusted spread of around 8%, a coupon-clipping strategy remains attractive, even in the absence of further spread narrowing. Sentiment remains supportive and spread levels remain attractive relative to longer term history and versus earnings yield offered by equities.

• Improving economic data continues to support the asset class. Based on spreads, the valuation gap between USD-denominated EMD and Global High Yield continues to favour the latter from a valuation point of view. However, Emerging Market Debt continues to have a lower risk premium relative to high yield corporate issues.

• The robustness of the US recovery is still under scrutiny and not providing fundamental support to the USD. Also, the USD is unlikely to find support as we have not seen anything to change our opinion that the Fed will err on the side of caution and keep rates low for longer than current forward money market rates suggest.

Canadian Dollar (CAD) – Driven By Global Equity Markets Performance

• The CAD's near–term direction is likely to continue to be driven by global equity markets performance, thus further strength in riskier assets could propel the CAD higher. However, with current valuations appearing to have moved ahead of the currency's fundamental drivers, some consolidation should be expected.

Euro (EUR) – Maintain Neutral Stance Versus The USD And Marginal Preference Against The GBP

• Despite further upward revisions in consensus forecasts for 2010 GDP, the Eurozone remains the expected economic laggard of the world next year. Overall we keep our neutral stance against the USD and marginal preference against the GBP.

Sterling (GBP) – Growth Profile For The UK And Deteriorating Public Finances Are Unfavourable For The Currency

• Our preference for the EUR against the GBP, based primarily on the UK's deteriorating public sector finances and a marginally unfavourable interest rate differential, has been the right view recently and one we maintain. Against other currencies, we retain a neutral recommendation.

Japanese Yen (JPY) – Fundamental Data Are Not Supportive Of The Currency

• A strengthening JPY is unlikely to find medium-term favour because of the impact on exporters. Deflation risks are the most prevalent in Japan of the major economic areas with negative implications. The recent trend has been positive but much of the fundamental data are not supportive so we retain our neutral position.

AUD & NZD – Further Rate Hikes by RBA Are Expected

• The AUD and NZD touched new highs in September on the back of broad USD weakness. Australia's central bank unexpectedly increased the overnight cash rate target by 25bps to 3.25% and signaled further rate hikes in the coming months amid evidence that the economy is recovering. However, from current levels we see more downside than upside potential for the AUD.