William Kay: With the bears nipping at the heels of the hippos, it's a jungle out there

It wasn't the most exciting prediction the world has ever seen, but my forecast last September that we were entering a hippo market was taken up by Edward Bonham Carter, guiding light at Jupiter Asset Management, and is now becoming a source of solace to a wider audience.

It wasn't the most exciting prediction the world has ever seen, but my forecast last September that we were entering a hippo market was taken up by Edward Bonham Carter, guiding light at Jupiter Asset Management, and is now becoming a source of solace to a wider audience.

I wrote: "The question is whether industrial growth can grow fast enough, soon enough, to take up the running as consumers run out of steam, particularly as they may face modest hikes in interest rates. That is why the bear is still twitching. We are moving into that tricky phase between a bull and bear market, more of a hippo market really, floundering around in the mud, slipping below the surface from time to time, then coming back up."

The reason I say that is becoming a source of solace is that investors, professional and amateur, are rudderless. Despite the recent rally, the FTSE 100 index has gone nowhere since December, weighed down by higher interest rates, actual and promised.

Another leading investor succumbed to uncertainty this week. Robert Talbut, chief investment officer of the Isis fund management group, has retreated from equities. He said: "Equities should make some modest progress during the rest of the year, but our overall impression is that the easy gains are over."

This, however, is positively tame compared with the apocalyptic bearishness of Jeremy Grantham, British-born chairman and co-founder of the Boston-based fund manager, Grantham Mayo Van Otterloo. He regards the 1,000-point rise in the FTSE 100 as the greatest sucker rally in history and says: "There's never been a more broadly overpriced global asset base than there is today - never." One failing you cannot accuse Mr Grantham of is uncertainty.

The Madrid bombs reminded us that the stock market is still vulnerable to shocking events. As Jeremy Tighe, manager of Foreign & Colonial Investment Trust, says in the trust's latest annual report: "The unexpected keeps on happening." If terrorists want to precipitate a bear market to end them all, they simply have to set off a sequence of atrocities on a monthly basis. Short of that, the market has developed the ability to absorb the occasional attack. The reason that 9/11 had such a powerful effect is that there is nothing worse than not knowing where the next hit is coming from, and at that stage it seemed possible that al-Qa'ida would launch more of the same on a regular basis. Happily, that has not come to pass and a pattern has gradually developed which leaves room for rational investment decisions.

Mr Grantham takes the view that the US and therefore the rest of the world's stock markets are being propped up by George W Bush's need to keep the American economy vibrant until November's presidential election. After that, on Mr Grantham's analysis, share prices will be a little like the cartoon cat that walks off the edge of a cliff and stays in mid-air for a few seconds - then plunges.

This seems a long way from our friendly if slothful hippo, sloshing about in the mud. But, as I said at the time, hippo markets persist only while investors are making up their mind whether they are in a bull or a bear phase. Enjoy the present stability while you can: it won't last.

* While attention has re-focused on Japan lately, there is much to said for the rest of the Asian region. It is a beneficiary of the rapidly awakening Chinese dragon, is taking on plenty of outsourcing work for the west, and is developing its own consumer boom.

One way into the region is the Henderson TR Pacific Investment Trust, which is heavily skewed towards China, Thailand and Taiwan. The potential there is enormous: average incomes of less than £1,000 a year in several cases, yet savings ratios of more than 10 per cent of income.

Gilts could add lustre to your Isas

Now we're into the new tax year, Isa has become a dirty word among the fund management fraternity. The season is over, so we are supposed to wait until next January to be prompted into taking up our new Isa allowances.

This is not only arrant nonsense, it is cynically bad advice. Whether you have a lump sum to invest or prefer to drip-feed money in, logic dictates that you should do so without delay so that your tax-protected nest egg can benefit from its Isa wrapper for as long as possible.

Some of the tax relief on dividends has gone, but there is no tax relief at all on dividends from shares held outside an Isa. And this is the last tax year in which you can put up to £7,000 in an Isa.

My inclination is to avoid putting shares into an Isa this year, given the uncertainties I refer to elsewhere on this page. But I jib at the charges levied by bond fund managers when returns are likely to be low anyway.

Gilts can go into an Isa if they have more than five years to run. While their capital gains are tax-free anyway, that is not an issue with most as they are trading above par. Crucially, though, all the interest is tax-free within an Isa.

And index-linked gilts could be a good hedge against uncertainty. The interest is linked to the Retail Prices Index, so it maintains its real value and guarantees a real return. You can buy them at Post Offices, or by phoning the Bank of England on 0800 818614.