Serious Money: Sometimes it seems that traders and dealers know as much about horses as they do about stocks, so it's hardly surprising that the oldest adage of asset management links the investment calendar to the racing season.

The seemingly simplistic strategy of "sell in May, go away, and don't come back 'till St Ledger Day" is based on the assumption that markets will react disproportionately to any event over the summer months, since fewer buyers and sellers will be active in thin and illiquid holiday markets.

And once again, in 2006, the saying proved prescient, since equity markets tumbled amid volatile geopolitical conditions as the summer began.

But what of the saying's less well known second half? Stocks usually reverse summertime losses during the third and fourth quarters, when improved liquidity offsets volatility. Buying equities in mid-September is often a sound strategy.

So should investors return to the market next month, when the St Ledger has run? Or are stocks odds-on to struggle over hurdles in the months ahead?

Conditions underfoot are decidedly soft as the autumn approaches. Monetary policy is tightening globally, geopolitical risks are distorting asset allocation decisions and energy costs are rising.

Maybe my training as a dismal scientist conditions me to see half-empty glasses where others see opportunity, but personally I'm bearish on equities looking out to year-end.

Consider the initial hurdle posed by higher interest rates. US rates may now have peaked, but rates are rising in every other G7 country and global economic activity is decelerating.

Optimists believe that the end of the US Federal Reserve's tightening cycle will trigger a relief rally on Wall Street, since stocks tend to rise when rates fall. And given that international markets follow the US's lead, optimists expect a strong end to the year for global equity markets.

Yet such optimism ignores current economic reality. US economic growth halved between the first and second quarters of 2006. Activity in the US housing market is clearly starting to slow as mortgage interest repayments rise, and consumer confidence is faltering, given the rising cost of living.

So rather than assume that a peak in US rates will see stock prices rise, wouldn't it be more relevant to ask if the Federal Reserve has already hiked too far? Interest rate hikes have a lagged effect on activity. The US economy, already struggling with record gasoline prices, has yet to feel the full decelerating effect of the four Fed rate hikes announced in the year-to-date.

Higher global interest rates are also affecting sentiment in the hedge fund industry. Higher rates are forcing speculators to reverse the carry trades which have driven many markets in recent years.

In its simplest form, the carry trade involves borrowing a low-yielding currency to fund an investment in a higher-yielding asset. Last year, for example, a hedge fund might have borrowed in yen to take advantage of near-zero Japanese interest rates and used its borrowed cash to take a play on the Nasdaq.

When interest rates were static, so too was the cost of servicing such debt. Yet rates are now rising globally, even in Tokyo, and further hikes are expected.

Free money is a thing of the past for speculators, which is curtailing the alternative investment industry's ability to run highly leveraged positions.

So optimists must reconcile the reality of decelerating global economic activity, declining speculative appetite and tighter credit conditions with their expectation of higher equity prices. Can stocks really rise if growth is set to slow?

Global equity markets will likely struggle against these economic headwinds into year-end, although certain defensive stocks (and specific regional markets) are bound to outperform as cash is reallocated from high to low-risk investments.

Energy is an obvious example of a sector that should weather any storm, since global crude consumption continues to grow. Regional markets, such as eastern European accession states, should also continue to benefit from an influx of foreign direct investment ahead of anticipated monetary union.

Yet other asset classes could outperform equities despite the risk of higher rates and slower growth. Cash yields will increase as rates continue to rise, and since real, inflation-adjusted rates have now turned positive in the euro zone, low-risk liquid deposits may soon find favour among investment managers. Inflation should also fall as higher interest rates slow economic growth, further boosting cash's real yield.

Commodities could outperform equities in the months ahead, if current drivers sustain. Oil should continue to benefit from a supply/demand imbalance; steel and other non-precious metals will likely hold value if Asian economic growth continues; and gold might yet rise again, if interest rate hikes fail to control inflation.

Finally, fixed income markets merit consideration. Bond prices should fall when interest rates rise, since the present value of a future fixed income stream declines when variable rates rise.

Bond prices are currently rising, contrary to financial theory. Rising geopolitical tensions account for this anomaly. Heightened risk aversion among investment managers has affected asset allocation decisions and investors are flocking to the safe haven of government-issued debt, driving bond prices higher.

This trend could well continue for several months if tensions in the Middle East escalate.

So perhaps we should consider rephrasing the adage: "sell in May, go away, and don't buy equities while rates are rising".

Instead, take shelter in cash, commodities and bonds until interest rate cuts kick-start the US economy and reinvigorate global equity markets in 2007.

• Niall Dunne is an Ulster Bank financial markets strategist.

• The views and opinions expressed are personal.