Volatility is bound to stay high over the coming months and investors should remain cautious amid an environment where sharp sector and asset allocation will be the key feature of investment strategies, says David Shairp, global market strategist at JPMorgan Asset Management.

ôInternational investors will need to be quite nimble as we see a good chance that the early part of 2008 will continue to have its share of ups and downs,ö says London-based Shairp, who was in Hong Kong recently to speak at the JF Asset Management annual investment outlook briefing for financial advisors.

ôVolatility is here to stay. Risk-adjusted returns will deteriorate. It will be harder to generated risk-adjusted returns in 2008,ö he adds.

Within equities, Shairp prefers Europe, Asia-Pacific ex-Japan and large-cap US stocks.

As long as risk perceptions remain elevated, Shairp intends to stay underweight in small caps and will continue to prefer growth over value, with a bias towards companies with high-quality earnings and strong cash-flow generation.

ôAll regions are likely to participate in a relief rally when it comes, and good stock selection will be the key to outperformance in 2008,ö he says.

Shairp makes certain assumptions, which have helped him form the basis of his investment strategy so far this year.

He believes an economic hard landing in the US is more likely, and investors need to plan accordingly. He also believes that global inflation is not yet a major concern and the US Federal Reserve will continue its monetary easing policy.

Equity continues to look cheap versus bonds, especially in the US and Japan, Shairp says.

ôTiming indicators suggest that stocks are looking oversold, while risk tolerance has crumbled. Global liquidity remains broadly supportive for equities and could become more so,ö he says. ôThere is considerable valuation support amid all the uncertainty.ö

He notes that prospects for earnings momentum and liquidity inflows are still better in emerging markets, a consensus call among many fund managers.

Shairp expects emerging market returns to be closer to 10%-15% annually over the next two to three years, sharply below the ôstaggeringö 34% gain that the market experienced in 2007.

ôEmerging markets will have a final bull run. There is still some way to go because after all, a bull market does not end at a price/earnings ratio level of 14 times,ö he says, citing current valuation estimates for emerging markets.

WhatÆs important to note is that microeconomic factors û and not macroeconomic bets û will help determine investment performance this year.

ôItÆs all about the micro, not the macro,ö he says. ôFinding the companies and focusing on the managers are important.ö