As long as US inflation remains low, the current strong performance of world equity markets should continue, one of Britain's leading economists has said.
Mr Gavyn Davies, the chief international economist at Goldman Sachs, said there were "no massive signals in equity markets which normally come before the end of a bull market".
He was speaking at a press briefing before yesterday's Ulster Bank Investment Managers' investment conference in Dublin.
"The only real threat to the current strong performance is rising inflation expectations," he said. He added that a 1 per cent rise in inflation expectations had the potential to knock 15 per cent off world equity values.
He said he did not envisage any increase in inflation this year or next, although trade balances between the United States and Europe and the United States and Japan might put some pressure on inflation.
The doubling of the US trade deficit in the last few years was not an immediate problem, but was a cloud "that could cause trouble".
"Investors at the top remain cautious, but there is no sign that the bullish consensus is reaching a dangerous point," he said.
So far, the Federal Reserve had been taking actions supportive of the equity markets. "I am a little more worried about the Fed going into the future. It may try and rein things in, but I don't think the inflation data will be present to trigger a rate rise."
He added that world inflation would be kept down because of the slow pace of recovery in Japan where there was still "no sense of emergency".
On the euro, Mr Davies said it was undervalued and would soon recover against the dollar and sterling.
"It is weak for understandable reasons, in that most of the major European economies have been weak for three or four quarters compared to the United States," he said.
He predicted that, within a few months, the euro/dollar rate would recover to 1.20. He said European interest rates should remain low and he forecast a 2.5 per cent rate by next year.
In terms of the Republic's economy, Mr Davies admitted he had failed to predict the current growth rates, but expected them to continue. "The Republic's economy has to be seen as an attractive region of the single currency area, similar to the way Silicon Valley is a region in the US economy," he said.
"As long as the education and demography remain as they are, the growth rates can be sustained at their present high levels," he said.
