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This is the most difficult time of the cycle to make decisions on asset allocation. Interest rates are now expected to rise later this year in the US, eurozone and - rather incredibly - the UK. Bond yields are rising in tandem. High commodity prices will either eat into consumer demand or squeeze profit margins.

What, therefore, is the investor to do? Stock markets have been going backwards for most of the year, and higher interest rates, bond yields and lower profits do not offer a promising outlook for the second half. Government bond yields do not seem to offer sufficient compensation for the risks from inflation; their main appeal is as a short-term hedge against recession. Corporate bond spreads look attractive, at the investment-grade level at least, but if government bond yields are rising, the sector will do well to stand still. Commodities have had a remarkably good run. Index-linked bond yields are at historic lows. And our houses are losing value; in my area of west London, estate agents suggest they are in freefall. That is not going to be good for consumer confidence.

In the circumstances, the best idea seems to be to aim for a few easy singles, rather than attempt to hit boundaries. There are currently a whole host of savings accounts offering more than 6 per cent, not all of which are with Icelandic banks. A steady 6 per cent is attractive in an insecure world. If you are worried about the risk of a building society going bust, there are triple A-rated sterling bonds from the World Bank and European Investment Bank on yields of 5.5-5.9 per cent, and with maturity dates of December 2009.

The next step is to tilt the portfolio towards markets that are well down on their historic highs. That means Japan, which has been disappointing investors for almost 20 years, but at least looks reasonably priced relative to cashflow and asset values. It has also held up better than most stock markets this year. Commercial property funds trading at a 20 per cent discount to net asset values are also worth a look – provided clients are not already overloaded with them, of course. 

As I have mentioned before, the pound looks to be heading for a fall against the dollar in the medium term. Pimco, the US fund managers, operates a number of dollar-denominated funds out of Dublin – one, the Global Real Return fund, invests in index-linked bonds that offer rather better real yields in the US than in the UK. The bold might be thinking that 2009 will be a good time to buy residential property in the US, when prices might be starting to bottom. And there is a case for preferring US equities, where the central bank has been aggressive in cutting interest rates and the cheap dollar is fuelling an export boom, over the UK market.

If you are making some purchases in these areas, what should you be selling? I would be nervous of emerging markets at the moment, where governments are grappling with a tricky inflation problem; if they push up interest rates too much, they risk recession, but if they do too little, their currencies may slide. Investors in commodity funds should be taking some profits; the long-term case for commodities might turn out to be right but they can be very volatile in the short term. and if the money markets are right and the Bank of England really does raise rates in the second half of the year, the London market is going to be very vulnerable. Let us hope that Mervyn King sees sense.

Philip Coggan is Buttonwood columnist for The Economist