Flemings Asset Management, the fund management arm of British merchant bank Robert Fleming, is taking a highly cautious view on emerging markets next year, despite the increasingly cheap valuations that are becoming available. The company, which has assets of about GBP63 billion (HK$821.63 billion) under management, conceded that equities had become highly attractive but warned that global economic conditions had changed substantially, guiding in a period of possible deflation. As a consequence, Flemings is overweight bonds, overweight cash, and underweight equities. The company's director of emerging markets, Michael Hughes, said emerging market performance next year was still highly dependent on developments in key countries, such as Brazil, China, Japan and the United States. He said events such as Brazil's ability to put in place sufficient reforms to avoid a recession and China's ability to achieve sustainable growth would be key to emerging markets. He also said the US and Japan also played very important roles because a loss of confidence in Japan would undermine growth in the rest of Asia. Similarly, in the US, a 'situation where labour costs are rising, the possibility of an earnings downturn of the [S&P 500] index, could have a big impact on emerging markets', Mr Hughes said. However, he accepted that emerging markets valuations had fallen, relative to the Standard & Poor's 500 Index, to their lowest levels since records began. 'They are now as low as when Latin America was halfway through its lost decade [the 1980s] and since before the fall of the Berlin Wall.' Michael Yuen, director of institutional marketing at Jardine Fleming Investment Management, said Hong Kong's fortunes next year were still dependent on the level of interest rates, and Asia as a whole would experience only a very slow recovery. 'China's economy will also have a big impact on Hong Kong,' Mr Yuen said.