EQUITY markets globally are more than fully priced for an economic rebound, says the chief investment officer of Bank Julius Baer.

'Cheap money alone does not sustain (markets),' says V Anantha-Nageswaran. 'When you get an 85 per cent return in six months that used to take three years, a lot of good news is already in prices. We should not take risk at this stage - particularly in developed markets. 'Right now, the biggest risk is market expectations and investors not giving enough time for economies to recover.'

As the US has weathered three crises - in banking, housing and credit - it may take four to five years for conditions to return to pre-crisis levels, he reckons. 'There is an expectation of a 4 per cent growth in GDP for the US, and a recovery next year. That is a big risk. There is a mis-pricing of risk that we are simply not prepared for.'

He is telling clients to buy near-term call options on equity indices with a two to three-month expiry that allows investors to benefit from market momentum. But more importantly, they should also buy put options for six to 12 months as a hedge against downside risk.

In a presentation to clients yesterday, Dr Anantha-Nageswaran painted a bleak picture of the US economy, where credit remains tight for businesses and banks' non-current loans are rising. While public sector borrowing has rocketed, borrowing by households and businesses continues to contract. These trends bode ill for markets and valuations.

Similar trends occurred between 1973 and 1997, and the S&P 500 index returned minus 2.5 per cent. The difference then was that the dividend component buoyed total returns. 'In the past, even though stocks were going nowhere, you got dividends,' Dr Anantha-Nageswaran said. 'Today there are no dividends, and bond yields are higher than dividend yields.'

Demand for goods also remains weak, and prime mortgage delinquencies continue to rise. Investors, he says, would do better to buy equities only if the S&P 500 dips below 800.