Although valuations are reasonable, macro risks remain substantial. For now, investors should be neutral and seek to build overweight positions on weakness.

We are neutral on Australian equities and bonds, but still a bit nervous about the Australian dollar. While Australia faces some homegrown challenges, most of the risks emanate from offshore. We see a balance of potential upside—and downside—risks that argue investors should hope for the best, but prepare for the worst and ultimately hang on…

We continue to be neutral on Japan despite low valuations, as the catalyst for outperformance remains elusive.

While Asian economies seem poised for faster economic growth than the developed world, these superior prospects are already incorporated into equity valuations, leaving Asian equities vulnerable to near-term disappointment.

Japanese equities are again oversold, unloved, and undervalued to the point where in the past the market has managed to post subsequent relative outperformance. However, it may be some months before Japanese equities decisively outperform, given the headwinds of a strong yen and uncertainty surrounding economic policy and the strength of the global economic recovery.

The year 2009 will reveal whether Asia’s growth over the past few years reflected real structural changes rather than debt-fueled U.S. consumption.

While the macroeconomic outlook for Japan is not encouraging, Japanese equities have gone the furthest in pricing in a dismal 2009. Given the market’s depressed valuations, it may not take much to spark a rally, especially if the global economy begins to stabilize.