Equity markets made little progress in the third quarter, in the face of rising interest rates in the US and the UK and some modest inflationary fears. Despite volatile markets and the approach of the millennium, our experts are making few changes to their portfolios this time.

Richard Burns of Baillie Gifford says: "The last three months have been dull for all markets except the Japanese, as interest rates have been raised in the UK and the US, and fixed int-erest yields have continued to drift upwards. At the same time, there has been confirmation that 1999 is likely to turn out to be a good year for global economic activity, and estimates of corporate profits growth have been moving up, both for this year and 2000.

"We remain very concerned about the position in the US, where the trade deficit is now running at $25bn a month and the trend in short-term interest rates is clearly upwards. On the other hand, Europe, after rather a soft spring and early summer, now appears to be back on track for growth at a little over 2 per cent this year and profits prospects look quite attractive. In Japan, too, things are looking a little brighter on the economic front and announcements of company restructurings are being made almost daily.

"Within the portfolio, we are making only a minor adjustment this quarter. Although most of the Asian economies are on the mend, a process which will be greatly aided by recovery in Japan, the markets have sold off quite sharply and we want to take advantage of this setback, running down cash a little. We are maintaining our high bond position."

Jamie Korner of Newton argues that "There has been no real remission in bond markets so far in 1999, with real yields close to 4 per cent regarded as insufficient to combat the albeit temporary deterioration in inflation indicators. Failing a severe fall in equity markets, bond markets are likely to find favour only when the current round of interest rate tightening appears to be coming to an end.

"In the US, the Dow has retraced some 1,000 points from its peak; this is healthy and should provide a platform for advance once the interest rate outlook is clarified and the bond market has regained its poise.

"In the UK, buy-backs and special dividends and increasing merger activity, most notably in the financial sector, will sustain the market. In the short-term, it is difficult to see markets making major advances. Investors are likely to be buffeted by a series of squalls; further dollar weakness on the back of a burgeoning trade deficit; questions about the sustainability of the Japanese recovery; political problems in Russia and perhaps China; or millennium-induced illiquidity.

"On a short-term view, bonds may be over-discounting the worst and are probably more attractive than cash. Equity investors are best advised to sit on the sidelines and to take occasional advantage of the increasing volatility of thinly-traded markets to purchase long-term growth stocks. The bull market is not over; this is the pause that refreshes.

"Thanks to Japanese returns our exposure there has increased. Within our UK allocation, we believe the cyclical sectors to be oversold and have increased weightings there, funded by a reduction in the overall financial exposure."