David Stuart, Head of Mercer's Dynamic Asset Allocation team in Australia and New Zealand, said despite the shake-up caused by world events, global equity markets had proved resilient.

"With the exception of Japan, which has fallen nearly 10% since our last report in January, major equity markets have delivered positive returns, led by the S&P rising 3.6%. Given the backdrop of the Japanese earthquake, political turmoil in the Middle East and North Africa, resurgence of European debt worries and rising inflation pressures in major developing economies, this is a resilient performance and a promising sign for investors," Stuart said.

"Based on our analysis, and in line with our recommendations last quarter, we are advocating an overweight position in global shares relative to overvalued bonds," he said.

Looking at domestic markets, Stuart said the big story for Australian investors is the strength of the Australian dollar compared to a weak US dollar, but warned this rally had left the Australian currency looking exposed. Mercer's medium term view therefore remains biased towards overseas currency exposed assets which should remain overweight.

"With the Australian dollar at a post-float high against the US dollar close to US$1.10, we are currently experiencing a sweet spot of strong commodity prices and rising interest rate differentials. However, this strength will be hard to sustain once US interest rates begin to rise, and there are downside risks to commodity prices in the medium term" Mr Stuart said.

"This isn't expected to happen until 2012, but if the US dollar turns, it could also impact commodity prices and put significant downward pressure on the Australian currency over the next one to three years. Therefore we have placed a very conservative valuation on currency, shifting from unattractive to very unattractive.

Mercer has a retained a neutral rating for Australian equities, given the broader outlook for earnings growth in Australia remains positive. 

Stuart said while the tragic events in Japan pose a mix of adverse impacts on growth and higher prices, they are likely to prove much smaller and briefer than the effects of surging commodity prices.

"Putting aside the short-term impact of the Queensland floods, evidence is mounting that the resources investment boom is set to dominate Australian economic growth for the next few years," Stuart said.

  The April quarter also saw Mercer change its fair value signal for Global Real Estate Investment Trusts (GREITs) from neutral to unattractive based on US REITs (which make up 40% of the global index) moving above fair value.