Economic headwinds are expected to continue through to at least late 2009 — that is according to the LOM Investment Policy Committee.

The committee, which released its July report earlier this month, said that despite global economic conditions improving over the past few months, recent data on employment, housing, industrial production and retail sales remained very weak, while developed economies were still fragile and showing only small signs of development.

It believes that equity markets were oversold in early March, but since then the Standard & Poor's 500 Index had rallied over 37 percent and equities were nearing unjustified levels, with nothing to suggest either a strong economic recovery or a sustainable rally above current equity levels.

The committee said it was more likely to see a down or flat market by autumn than an up market, while in the alternative investment market, real estate funds and commodities had similarly performed well over the past few months, but it did not see much support for a continued rally without increased demand from the Group of Seven (G7) countries.

"In the longer term, we expect commodities to outperform other asset classes as economic growth resumes," it read.

Meanwhile, the Committee reckons that although government bond yields have risen from record lows six months ago, rates were still at historical low levels, with it no longer being a question of if, but rather when rates will climb.

"In our view, short-term and floating rate bonds are the most attractive fixed income investments since they will relatively outperform longer-term, fixed rate bonds in a rising rate environment," it read.

It concluded that despite currency movements and a weakening US dollar, the Japanese yen, euro British pound and Swiss franc had moved sideways and range bound against the dollar over the past month, a trend which it believes will continue in the future.