It says that market expectations a quick outcome in Iraq will give a sharp lift to the global economy are misguided.

"Since markets are positioned for a rosy outcome to the war and an immediate economic bounce, the balance of risks is skewed in the other direction."

It says although shares look cheap relative to bonds there are some good reasons to be sceptical of this conclusion. One is that falling interest rates aren't always positive for valuations, and the spate of rapid shifts in earnings expectations can distort signals.

"As a consequence, we have moved from underweight to neutral on fixed interest. Further, significant cuts to earnings forecasts cause us to question the cheap signal from equity valuation models."

Macquarie says the outlook for global growth has not improved recently. It doesn't believe a quick outcome in Iraq will be the trigger for "widespread economic recovery", and it says a sharp bounce in US consumption and investment is unlikely.

One of the surprises is that Japan has proved to be quite resilient in these markets, however Macquarie is concerned about Europe, and in particular Germany where things are turning bad.

Another unfavourable place is Australia.

"In Australia there remains too much complacency about growth and earnings," Macquarie says. "The greatest risks are a sharp fall in consumption and a cut in investment plans."

It says earnings forecasts could be cut by another 10% in Australia.

"We will not be comfortable moving back overweight Australia until earnings are cut at least another 5% and the Reserve Bank of Australia has begun easing."

Macquarie says that within its overweight position in Asia, Hong Kong and New Zealand are most preferred and Australia and Singapore the least.