What do you think will be the key factors in the long term?

It's all about the timeframe. We're at an interesting time, and the bond markets are a great example. One's long-term expectations are probably very different from short-term expectations.

Starting with the long term, it's very clear that bond markets are, pretty much everywhere, extremely overvalued. You look at yields on inflation-linked bond markets and in places like Japan and the UK and the US you've got negative real yield. So in other words, if you're putting money into these things and holding to maturity you'll get a negative return of close to 10 per cent over a 10-year period.

So why would anyone invest in an instrument that will give them a negative real return? The answer to that question lies in the fact that despite some recent improvement in sentiment towards the global economic outlook, there is still a great deal of fear and nervousness within markets, which has pushed the valuation of bonds up to extraordinary levels. Obviously the same sort of fear that's very evident in inflation-linked bonds is also inherent in straight bond markets as well.

What about locally?

Looking at Australia, Australian inflation-linked, government inflation-linked yields are around half a per cent, which is pretty poor. It's better than in other developed countries, but still pretty poor.

The same sorts of fears are inherent in straight bonds as well. Looking at the 10-year returns in Australia as well, that's about 3.3 per cent. With inflation around 2.5 per cent, that's not a great return either.

We're at the end of a 30-year period in which long bonds have produced returns way in excess of what they should be expected to produce. That's very evident in a country like the US where long bonds have returned, on a real return basis, something like 8 per cent per annum over 30 years. The long-term average is 2.8 per cent per annum since the mid-nineteenth century.

So what does that mean for bonds?

We would expect, going forward, some sort of mean reversion such that you see returns from bonds falling fairly substantially. That's the long-term picture which is relatively straightforward.

The shorter-term view on bonds is always more tricky. A short-term view on anything is always more tricky but in the case of bonds, there is still a case for being invested on a short-term basis. The fact is that economies globally remain fairly weak; they are running at sub-par levels of growth. One of the key issues is the extent to which fiscal stimulus - very aggressive fiscal stimulus, particularly in the US but also in Japan - has given the appearance of economic strength.

Once you see fiscal contraction, as you inevitably must, then it will become clear that the underlying demand is really not strong at all.

While the global economy remains weak, it seems quite hard for it to move out of this post-crisis period and in that sort of environment you would expect bond yields to fall or stay very low. There is certainly still room for bond yield to fall in the short term and therefore we remain fairly well exposed to bonds in our portfolios.

What will Aberdeen do with its bond exposure in the longer term?

We're certainly very cognisant that in the long term, bond yields do not offer good value. So we will be looking for opportunities over the next one or two years to move out of bonds.

These cycles can often take a lot longer than people think they should take. You look at the case of Japan: When the JGB (Japanese Government Bond) yield hit 2 per cent 10 to 12 years ago, no one would have expected them to continue to fall to below 1 per cent as they did over the next 10 years. When you're in this sort of post-financial crisis world, deflationary pressures are predominant.

What about equity markets?

On a longer term basis [they] present 'OK' value.

The expected return from a particular equity market is equal to the dividend yield plus long-term growth plus the change in the PE ratio. The last component there is always the hardest to predict. In the case of Australia, the market does actually reasonably good value based on dividend yields - dividend yields in Australia are still relatively attractive.

There's a strong relationship with equity markets everywhere, between inflation and PE ratio - sort of an inverse relationship.

When inflation is low, PE ratios tend to be quite high. If we, as we expect to, remain in this low inflation environment for some time, we think there is scope for equity market valuations to go up. That's to be an added source of return in addition to dividend yield and growth.

Are any regions particularly appealing?

With high yield markets we tend to focus on the US; we still think there's scope for yield or spread compression. There is an appearance of overvaluation in high-yield markets but that is not because the spread has fallen but because long-term interest rates have fallen. So the fact is that in terms of the spread you still have a very decent margin above Treasury of around 6 percentage points

Given default rates at the moment are very low, that gives quite a lot of scope for further contraction in spreads, and further depreciation of high-yield markets.

Do you have views on any other asset classes?

As far as gold is concerned, the key way to look at it is the real gold price over the long-term and on that basis gold is very close to all-time highs, so you'd have to start to feel a little bit nervous at these levels. That's not to say you can't get it going up further in real terms and there are good reasons why one should expect that, but it's kind of at the point where we're getting close to the peak.

I think the peak will come when you start to get inflation in goods and services around the world starting to take hold as a result of this loose monetary policy we've had over the last four years. That hasn't resulted in inflation but at some point it will, probably in four to five years from now.

At some point, we will need to see monetary policy being tightened. When that happens, that's when you'll see the peak in the gold price, but until that happens gold still looks good. Unemployment rates in the developed world remain far too high and that tells you monetary policy won't be tightened for a long time yet.

So monetary policy is a major driving force in most asset classes?

Ultimately, monetary policy is the key driver of financial markets. We've had this extraordinary run in equity markets over the last eight months. If anything economic performance has been slightly worse than would have been expected eight months ago.

But had economic growth been strong, we would probably have had some monetary tightening which would have been bad for equity markets. But if economies had been weaker that would have impacted profits. This sub-par economic environment has probably been good for financial markets because [monetary policy] has remained very loose.