There have been numerous warnings of a likely correction in the current quarter. The buying spree in equity markets, many fund managers contend, is unsustainable. While Baring Asset Management agrees there will be a correction, it believes it will be manageable.

Although financial markets may seem to have run out of steam and some measures show risk appetite at extended levels, so far little money has flowed back in to higher risk assets meaning any pullback in the market is likely to be mild and short-lived, according to Barings.

Barings' latest global economic research anticipates a "gentle recovery" beginning sometime in the second half of this year in Western economies, led by the US. Critical to this process is the unwinding of the excess inventories built up since last autumn, the fund house says, noting that final demand has fallen but not by as much as output has been cut. Once inventories have been run down then production should recover.

Andrew Cole, London-based director of asset allocation at Barings, continues to be encouraged by the improvement in most leading indicators and the lessening of job losses in the US manufacturing sector. However, he notes that there are few signs yet of any powerful underlying rebound in economic activity. Private sector credit conditions are still weak, he says, with bank lending appetite still contracting albeit at a slowing pace.

Year-on-year US bank lending is falling, although this is being offset by very strong public sector borrowing.

Two worrying developments have been the rise in long-term interest rates and the sharp increase in oil prices, according to Barings. US petrol prices have actually been pushed through the psychologically important $3 per gallon level.

Barings remains overweight on equities but has adjusted exposures within the asset class. Consumer staples have been upgraded from underweight to neutral and materials downgraded from aggressively overweight to overweight. The group has also downgraded the commodity-linked currencies to neutral after sharp rallies.