Global economic prospects continue to deteriorate, but inflation is proving to be manageable and is becoming less of a worry for investors, according to Aberdeen Asset Management.

ôThe outlook for inflation has improved, given a weakening oil price which, along with slowing economic activity, should encourage the major central banks to resist tightening monetary policy for now,ö says Edinburgh-based Mike Turner, head of global strategy and asset allocation and manager of the Aberdeen Multi-Asset Fund.

Aberdeen believes the price of oil could fall below $100 a barrel, or at the very least retreat towards that point. Other commodity prices are now well below year-ago levels and Aberdeen sees scope for further declines as prices continue to react to faltering global demand.

In fixed income, scope for steeper yield curves among developed market government bonds appears high, while poor corporate results may hurt credit markets in coming weeks, Turner notes.

Further market falls are possible in equities, he says, given that volatility has not yet reached the extremes we would normally associate with investor capitulation.

Aberdeen remains marginally overweight in equities, favouring Asia, emerging markets and Europe. The fund house is underweight in UK equities, where potential sterling weakness and a fragile economy pose considerable risks.

After years of being underweight in US equities, Aberdeen is now pouring more money into that market, but is short of going overweight. The fund house has been committing new money to the US market over the last year, but prefers to see further falls in overall market levels before going overweight on that market. Its main interests in the US include healthcare and technology, and in particular, stocks benefiting from cost-conscious consumers and businesses.

Equity markets in general have not fared badly during this quarterÆs results season, Turner notes. While some announcements have been poor, not all have disappointed investor expectations and this has been especially true within the financial sector.

ôAlthough the fundamental backdrop is undeniably poor, global equity valuations are pricing in a contraction of profits in the region of 15% to 20% and any further fall in prices of more than 5% would present an opportunity to take on additional risk,ö Turner says.

Global emerging markets have maintained least correlation with developed markets over the last 18 months. This deviation in performance has allowed Aberdeen to take some profits across portfolios, particularly within our global funds where key Latin American stocks û such as oil and natural gas explorer, producer, refiner and transporter Petrobras, as well as seamless steel pipe products maker Tenaris û have performed particularly well.

ôStrength in commodity prices has been a powerful force behind this exceptional performance, and so we are mindful that returns may moderate as the divergence between global growth and raw material prices is gradually redressed,ö Turner says.

In Asia, growth is slowing and this is reflected in a downturn in performance of regional indices. But Turner sees the good that could come out of this.

ôIt is at times like these that quality businesses staffed by management unafraid to cut costs come to the fore,ö he says. ôWe emphasise these characteristics in our stock selection, and feel comfortable continuing to have a strategic overweight in Asia."