"If the US sneezes, does the rest of the world catch a cold?" joked William De Vijlder, Chief Investment Officer at Fortis Investments in December in Luxembourg, to a room full of investment and banking professionals. But the question is also a valid one. In an increasing globalised world, and when considering investment strategy, be it in Luxembourg or elsewhere, the influence of foreign markets has to be considered. "The world has fundamentally changed in the last 5-6 years after the US century," said Vijlder. Although it is obviously still massively influential, the global economic cycle is no longer centred in the US. The drivers for global growth are changing.

The main characteristic of 2006 was the growth in global wealth. "Will the markets have confidence in us to keep the period of growth going?" De Vijlder asked. The performance of the markets in 2006 was even stronger than expected. "The solid growth of profits, the wave of mergers and acquisitions, the drop in the price of oil and the hope that the American central bank has finally achieved its objective and will not need to raise interest rates, along with other many factors, allowed the markets to overcome the geopolitical tensions and the rise of the aversion to risk in the second quarter."

"Before being able to lay down our policy of investment for 2007, we must answer three important questions," he continued. "The first question relates to the American housing market. After having profited for years from the rise of prices from residences and the refinancing of mortgages, American economic growth could, according to some, undergo a marked deceleration induced by the weakening of the real estate market and the rise of interest rates. The robust growth of incomes however leads us to think that this fear is unfounded."

The second question relates to the correlation between the various world business cycles, on the basis of the principle that the American economy is likely to involve in its deceleration, the rest of the world's economies. Such a scenario is - according to Fortis - not very probable. The current world economic expansion is characterized by its international character and thus is not solely drawn by the United States. "The European economy is going very well and domestic demand in Asian markets continues to progress at constant intervals."

American monetary policy is the third unknown factor. "Could it be that the cycle of tightening of the FED is not finished and that, contrary to the expectations of the market, new turns of the monetary screws could take place in 2007?"According to De Vijlder, this poses the largest risk for 2007. "Many analysts announce a monetary easing in 2007. Nevertheless, if it was not to be the case, and a new rise of Federal Funds was to intervene, the markets would, without a doubt, be penalized."

De Vijlder then summarised Fortis's outlook based on the following suppositions. World economic expansion will continue. Official rates will stabilise in the US, but rise in Europe. Government bonds will lose their attraction. There will be a rise in specific risk with regard to corporate bonds. A preference for local currency will be shown in emerging markets debt. There could be a slowdown in profits and a rise in price/earnings ratios. Stock exchange returns will be between 10 and 15%. The dollar should strengthen, and the principal risk could very well be the under-estimation of inflationary risk in the US.