There are clouds on the horizon but, barring an abnormal event - say if Iran attacks Israel - those clouds should be manageable.

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Flows indicate that investors are nervous, with significant flows out of equities into asset allocation and fixed income funds over the quarter. The roughly 200% run from the lows of March 2003 is being interpreted by 'the bears' as a sign that the market must be in perilous territory.

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This meant potential returns from developed market currencies should improve further as funds, chasing higher yields, flowed towards them.

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Your action in these markets depends on your risk profile. Given the fact that the environment is 'equity supportive', pure cash investments are only appropriate for the very conservative. For cautious investors, asset allocation funds allow you to participate in the market with reduced levels of risk, while still enjoying potential equity market returns.

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