Happy new year or is the bubble ready to burst?

Fund managers are becoming increasingly cautious as the risk of a major correction looms on the investment horizon.

Early last year, investment professionals talked about "overheated" markets.

However, in 1999, the word "bubble" is gaining currency. There is a general air of scepticism about whether the recent massive price rises for Internet and telecommunications shares are sustainable, as US Internet stocks continue their wild gyrations.

The Economistmagazinerecently coined the phrase "bubble.com" to describe the phenomenon. Celebrity investor George Soros recently told a French investment conference: "I think one can detect the formation of an asset bubble, similar to one Japan had in the late 1980s," Soros.

US Federal Reserve Board chairman Alan Greenspan has also warned that US stock prices may be too high in relation to profit growth expectations for US companies.

In Australia, many fund managers say the risk of a major correction for high-flying stocks in the US could see a corresponding drop in the Australian share market.

Tyndall group investment director Doug Little, for example, sees parallels from the past in the current irrational exuberance surrounding technology stocks.

"Those of us who remember the minerals boom of the 1960s can see the similarities with the current mania for Internet stocks and consequently telecommunication stocks," he says.

Another risk for investors this year is the volatility currently being experienced in Brazil, which could spread through Latin America and eventually cause a rupture in confidence in the US, the region's biggest trading partner.

As investment sentiment tends towards bearish, many fund managers are tweaking the asset allocation of their balanced funds by reducing exposure to equities in favour of the relative safe havens of cash and fixed interest.

But although they are reducing their exposure to the share market, many still see solid opportunities in the market for prudent investors. Small-cap stocks in particular have cropped up as a favoured sector of the stock market among many fund managers.

Listed property trusts, which have performed very strongly over the past two years, remain very popular amongst fund managers for their high yields and the diversification they provide.

Soundbites:

"Our equities team is predicting the All Ordinaries will move sideways or down during calendar 1999. There are still stocks that offer good value. Small to mid cap stocks, in particular, look quite cheap but we are still very selective in the resources sector. We are expecting similar returns over all asset classes."

Rodney Green

Managing Director

Perpetual Funds Management

"We are cautious about all investment markets and concerned about the valuations on some sectors of equity markets following a couple of good years. In Australian equities, small cap stocks are the stand out sector and we also like banks. I would advise investors to be cautious of "the magnificent seven" market favourites of last year."

Peter Mouatt

Head of Australian Equities

Mercantile Mutual

"Over the last year, we've seen significant price increases in international shares in particular. While there are still some buying opportunities in this sector, these investments look very expensive in relation to the returns they are likely to provide over the next few years. Listed property trusts are a good alternative for investors looking for returns higher than those in the cash and fixed interest markets, but don't want to be overly exposed to a fall in equities."

Susan Gosling

Chief Investment Officer

United Funds Management

"There are still stocks that offer good future returns and value, particularly in Australia's basic industries, such as CSR, BHP and OPSM. As a word of caution, I believe there will be a correction in Internet and telecommunication stocks which could have a dramatic effect on the All Ordinaries index. A good alternative is high yielding listed property trusts."

Doug Little

Group Investment Director

Tyndall

"Solid but unspectacular would be a good way to describe our position on investment markets for 1999. Investment markets are still not out of the woods and we are likely to see continued volatility as more flashpoints around the world emerge. Notwithstanding these ructions, we should see single digit or low double digit returns over most markets."

Olev Rahn

Head of Asset Allocation

BT Funds Management