Bill O’Neill, portfolio strategist at Merrill Lynch Global Wealth Management, gives his view on various asset classes.

The equity rally hasn’t ended, but it is moving into a new phase. We’re moving from a period of very cheap equities and extreme risk aversion into one where equities are more fairly valued. Future advances will be driven by earnings upgrades, rather than the recovery of investor demand that we have seen over the past few months.
 
Corporate bonds are attractive. The low-quality end of the market has run too far, too quickly, so avoid junk bonds at the moment. But there are still some opportunities in high-quality corporate debt.

Commercial property is another possibility, but with liquidity problems in the sector and rents declining, it is several months too early to invest.
 
Commodities are worth a look. Base metals are hostage to the China story. Although a China recovery is already well discounted by the market, if you are confident about sustained Chinese growth, metals exchange-traded funds (ETFs) could be a good investment. We believe that the best way to play commodities in the medium to long term is through gold. Investors should take advantage of any dips in the gold price to buy into gold funds or ETFs.
 
For equities, emphasis has moved back onto dividend yield as well as capital gain. This is attracting investors to cheaper defensive sectors – such as utilities and telecoms – and away from pure cyclical plays. We particularly like the IT sector, which still offers good, relatively cheap exposure to any cyclical recovery, as well as strong balance sheets and the likelihood of dividend payouts rising over time.
 
Long term, the best equity opportunities are in developing markets. Prices and expectations got ahead of themselves during the recent rally, but are already starting to slip back to more attractive levels. This setback gives investors the opportunity to add developing market exposure.