Joy Bolli: Giles, the emerging markets have been a kind of silver lining in the last couple of months. Nevertheless, since the end of June, investors seem to be withdrawing money from the Asian and Latin American markets. What is making investors anxious?

Giles Keating: After a big rise in markets, it's natural that you get a little bit of a setback. What I think is interesting is that when we've seen overall equity markets go down a bit, the emerging markets have quite often moved slightly less than the overall. This says to me that the fundamental long-term trend in emerging markets is still very positive. It certainly fits with my economic view – I think that's where the growth is going to be. 

What could be the most promising markets in the next 3-6 months?

Still the emerging markets. I would certainly be taking advantage of any pullbacks to focus on them. Within the emerging market world, some of the big Asian countries. China has moved ahead very strongly – but then again, that is where the growth is. India looks very interesting. There was a bit of a setback after the budget, but fundamentally, we think that the growth story there is also good. Brazil also had a little bit of a wobble, but the underlying trend looks very healthy there. Where things are more confusing is perhaps in Russia, so I wouldn't be so focused on that market, although there can be moments of strength.

What about Africa?

I think Africa is very interesting in the medium term, but investing there is a very specialized activity. The number of stocks that you can buy is limited – espcially once you look outside of South Africa. They are highly volatile and suffer from many of the frontier-markets issues of low liquidity and lack of transparency in some cases. So, a very interesting, but also a very difficult place to invest.

The G8 summit is just about to end. They've reached an overall target in climate protection. But they could not agree on a common goal for emissions reductions. Are we only talking our way into a green future?

It clearly is very difficult to get agreement across the board on exactly how far each indivdual country should go in cutting or holding back emissions. What is very important in a positive sense is that there is an underlying political commitment to looking at the climate change issue. Therefore, I think this actually bodes well for some of the industries that are connected with climate change. So, although we have to be careful when some of these sectors occasionally get ahead of themselves – looking back over the last three or four years, we've had a bubble followed by a crash in solar energy stocks – but I do think there is a very positive long-term trend in many of the sectors connected with alternative energy and green technologies. And – as with any investment - we just have to make sure that we're picking the right entry point. For now, a diversified portfolio across those technologies looks a good idea to me.

So, if someone were interested in investing in alternative energies – what would you advise?

Well, at Credit Suisse we've got an index of alternative energies for example. I think basing investments around that index could well make sense. The index covers the main alternatives like wind, solar, etc. We've even got some of the more unusual technologies in there.

The IT- and telecoms industries have made headlines with smartphones, netbooks and now even with a new software system (Google: ChromeOS). What can investors expect here?

We've got exciting new technologies coming through, smartphones and so on, and also we've got geographic expansion – not just the developed markets and the usual emerging markets but even into frontier markets like Africa. Therefore, I think the long-term structural story is good. Many of the bigger IT-companies have strong balance sheets, which is reassuring at a time when there are still some financial question marks out there. And then, just in the very short-term economic cycle it looks as though demand for IT is picking up quite literally over the next three or four months. If you put those three factors together, then – for a sector where we've already had some gains – I think it tells us there can still be even more good news.

Some banks are consolidating now, growing stronger – but also bigger. Isn't that like a return to the old risks? 

I think it's one of the ironies that while regulators and many academic commentators are concerned about concentration in the banking industry and discussing whether the world should try to move away from that, at the same time what actually happened during the depths of the financial crisis was that the governments were actively promoting mergers of banks in order to make things easier to manage through the crisis. Now, how those two conflicting things are going to be resolved over the next one to three years, nobody can be absolutely sure. At the moment we can only say that the reality is: The banking system is a lot more consolidated now than it was a year ago. I suspect that in the short term that's probably quite helpful because it makes things easier to earn profits, and that strengthens the banking system in pulling itself out of the crisis.

And what about the idea of bad banks?

I think breaking a bank into a good bank and a bad bank has historically been one of the standard parts of the mechanism for helping to lay the foundations to escape a crisis. We've seen quite a number of cases where that's happened. Switzerland is one example. In Germany there is a proposal but there it's not quite the same as a conventional good bank/bad bank. There it's more to do with accounting changes. And certainly, in some other locations we're perhaps seeing this good bank/bad bank being formed more within an existing bank. So, this is an important mechanism and each country applies the particular mechanism in a different way.

Which currencies are promising at the moment?

What we are advising investors at the moment is a general policy of diversification away from the US dollar, to some extent into one of the longer-term stable currencies like the euro and the Swiss franc – but also into bigger emerging markets currencies, for example the Brazilian real and some of the Asian currencies. That program of gradual diversification is a good idea because, although the dollar may not be very weak in the short-term, we do see medium- to long-term risks there. As for short-term fluctuations, of course we can have moves in both directions, certainly in the case of the Swiss franc at the moment. The Swiss National Bank is continuing to prevent the Swiss franc from appreciating. That policy won't go on indefinitely but it is in place for the time being.

Eastern European currencies have been under pressure for some time now. What's the situation at the moment?

First of all, we have to differentiate among them. Clearly, Poland has not been under the same degree of pressure as Hungary. The second point to make is that we have now seen stabilization programs in the worst-affected countries, that is, they're receiving IMF loans. Even if in the very short term there can still be some currency volatility, it certainly suggests that, looking forward, perhaps things will be more stable than this very weak phase some of those currencies have experienced.

We've just started the second quarter earnings announcements. What's your expectation?

The analyst estimates have now edged up for the second quarter. Although we can never be exactly sure of how the individual figures will come out, I think the tone is likely to err on the positive side. In particular in the United States, company margins have actually started to improve even though the economy is still in recession. That's quite remarkable. The reason for this is that companies are still laying people off. But that means from a longer-term economic point of view we are seeing productivity improving much earlier in the economic cycle than normal, and I think that bodes pretty well. The only thing that worries me is that one of the reasons companies are being as vicious as this in terms of reducing labor is because they are still concerned about the financial system. They want to ensure they're generating lots of free cash flow. So, I don't think we are really going to see a truly optimistic tone until they start using that cash flow to spend. I think that might happen - but not quite yet.

So, overall, how should people be investing?

I think people should be gradually building up exposure to equities, certainly when we see weakness in equity markets. I do think people should be cautious in their bond portfolios in terms of duration. They should keep the maturity of their bonds fairly short. Certainly, there are good opportunities in the credit markets, but keep that duration short! I think people should be diversifying away from dollars as a long-term move.