Despite certain price recoveries experienced in late 2002 in the international equity markets, the environment surrounding them is proving to be extremely difficult.

Corporate profits are expected to increase however this will only provide some support to the equity markets. As analysts' profit estimates are still very high, downward revisions are expected and thus would adversely affect sentiment towards the equity markets.

Another factor which is increasingly putting downward pressure on the equity market and sentiment is the possible war with Iraq. This week we have witnessed greater pressure on Iraqi leader Saddam Hussein from the United States and the United Kingdom.

The US and the UK have ordered more troops to the Persian Gulf. American troops will number around 185,000 in the region by mid-February to attack Iraq if it fails to comply with UN resolutions. UN arms inspectors report to the Security Council tomorrow on Iraq's compliance.

British Prime Minister Tony Blair has put further pressure and stated that should Iraq fail to comply with the UN resolutions the UK will use military action even without UN support. He urged Saddam to comply with UN inspectors and disarm.

In view of these developments the euro gained against the dollar hitting a fresh new three-year high, and a two-year high against sterling. The main reason behind the extended gains in the euro was brought about by concerned investors who fled to quality.

Investors are seeing the euro as a safe haven currency against the dollar and sterling as countries such as Germany and France are working hard to prevent war and maintain security as opposed to the military action urged by the US and Britain.

The euro was also favoured by comments made by European Central Bank chief Wim Duisenberg, namely that an appreciating euro was not a problem to Europe. Duisenberg praised antiflationary benefits of a stronger currency especially when it comes to the persistent oil price increases.

The euro's year to date performance against the major currencies has been very good with an increase of 20.79% against the dollar, 7.92% against sterling and 7.48% against the yen.

Gold, considered as another safe refuge by concerned investors, hit $360 an ounce, its highest level since March 1997.

The international bond markets have also witnessed further gains. These were the result, on the one hand, of expectations that the ECB may pare its interest rates to boost economic recovery (Norway has cut its interest rate by another 0.5% and Monetary Policy Committee minutes show that the policy-makers think that world economic outlook will show some weakness) and, on the other, equities were forced to give way due to fears of war. The risk aversion caused by a potential war made bonds attractive.

If these uncertainties persist, volatility will prevail in equity markets thus hurting sentiment which is very much needed along with stronger company earnings to see a good sustainable recovery.

Mark Azzopardi, MA Finance; B.Com., is investment and finance director of Jesmond Mizzi Financial Services Ltd, e-mail: mazzopardi@jmfs.net

The value of investments can go down as well as up. Past performance is no guarantee for future performance. This article does not intend to give investment advice and the contents therein should not be construed as such. Readers are encouraged to seek professional advice regarding their personal financial situation.