Bulls and Bears Three reasons to be concerned, but not too concerned   Last year, we managed to slightly outperform the strategic asset allocation model due to our overweight equities stance. However, it is precisely this overweight equities stance that has hurt us at the start of this year. On the face of it, this could be viewed as surprising. US economic activity is accelerating and Q4 corporate earnings data has showed 68% of S&P 500 companies so far have exceeded expectations. However, early in the year, the market has been focused on three concerns for 2005. Three reasons for concern . . . First, as we highlighted in 2004, profit margins rose dramatically and are unlikely to be sustained at such a high level. Our view was, and still is, volume increases will allow earnings to grow even in the backdrop of profit margin compression, albeit at a more modest pace than in 2004. . . . including the two headline grabbers Second, the more aggressive tone from the Federal Reserve regarding the outlook for interest rates has led to a reduced risk appetite. Fed officials have repeatedly suggested a move away from a ‘measured’ pace of interest rate increases, towards more severe interest rate hikes. However, with inflation and inflation expectations still benign, we expect the Fed to stick to its ‘measured’ stance for some time to come. Finally, we have been reminded of the vulnerability of the oil supply situation. While we expect oil prices to fall somewhat in 2005, this forecast is subject to a high degree of uncertainty with OPEC already operating close to full capacity such that oil markets are vulnerable to any shock. Higher oil prices, theoretically, could undermine the situation from both a growth and inflation perspective, a very poor outcome for equity markets. For now, we retain our weightings for the major asset classes, but the risks are skewing to greater concern on the outlook for equity markets.