With the approach of the Year 2000 and the possibility of computer failures worldwide, it pays to play it safe, Bank of Bermuda investment analysts state in the latest World Watch newsletter.

They recommend investors put a larger chunk of their portfolio into US bonds due to concerns about the Year 2000 (Y2K) computer problem.

"The investment policy committee recommends a cautious approach to global bond and equity markets as we move into the second half of 1999,'' the bank stated in its latest World Watch newsletter. `Economies should continue to strengthen, thereby limiting bond appeal, however, as Y2K approaches investors should prefer the liquidity and safety of the US and Euro bond markets.'' In the bond market the bank stated that Y2K concerns may cause a flight to triple-A rated bonds.

In the equity market the analysts expect US corporate earnings to remain strong through the balance of the year, buoyed by the building of inventories in response to Y2K.

"Even though earnings are strong, they are not strong enough to support current stock prices in the face of negative liquidity,'' the analysts stated.

"As the global economy continues to improve, one should expect monetary policy to become less supportive causing liquidity to move away from financial assets.'' The trend will lead to weaker prices and set indices on a short-term downward move.

"So, in the near term, caution would be prudent in light of further market weakness over the balance of the quarter,'' the analysts stated.

They recommend a short-term underweight position in North American stocks.

European Union countries meanwhile appear to have reached an economic bottom.

The analysts predict that the region is in for a recovery as lower interest rates take effect.

In the UK equity market, the analysts expect an upturn during the second half of 1999 providing there is no dramatic change in US interest rates.

Asian markets remained volatile during the summer with US dollar investors getting a lift from strong local currencies.

"Restructuring will go a long way to gearing Asia towards a strong second half as it becomes more apparent that corporates and governments will look globally for cash,'' the analysts stated. "There could be a flurry of investor buying if and when World Trade Organisation membership is granted to China...The clear message over the summer has got to be, to take advantage of any market weakness and buy blue chip companies.'' The analysts recommend a portfolio of 60 percent equities, 30 percent bonds, five percent cash, and five percent in alternate investments.

In equities the analysts go for a mix of 40 percent in US large capitalised stocks, 10 percent in US small capitalised stocks, 24 percent in Europe, 10 percent in the UK, 10 percent in Japan, and six percent in the rest of Asia.

In bonds, they recommend 40 percent holdings in US and Canada, 40 percent in Europe, 10 percent in the UK, five percent in corporate high yield and five percent cash.