Ian Rowley, who is responsible for global equity strategy for Merrill Lynch Investment Management, is puzzled by what he is seeing in the world's stockmarkets.

He describes it in his understated London way as signs of "pockets of odd behaviour". What he really means is that it seems some recent share buyers have forgotten the lessons from the technology bubble and the bust.

Rowley says to understand today's stockmarket, you need to dig into the detail. The markets supposedly have improved because of an expected US economic recovery but, he says, the closer you look, the more concerning it is.

There has been some rise in the prices of cyclical stocks but the greatest gains have come in low-quality ones.

Merrill Lynch research shows that gains across most sectors have been concentrated in very low-quality stocks. This research concentrated on US companies but the same pattern is apparent in Europe, Japan and, to a lesser extent, Australia.

This means internet stocks have improved; biotech companies have moved up, defaulted Argentine debt has been the best-performing asset in the emerging market debt area, and Japanese banks and what Rowley calls Japanese zombie companies have all risen.

"If you believe there's an economic recovery, I'm trying to understand what the correlation is between biotech companies . . . defaulted Argentine debt, Chinese internet stocks and US automobile stocks with fundamental problems. There's no common theme at all except that these things are perceived as risky."

In addition, many companies with junk bond status have been able to raise capital recently. One example (from another fund manager) was of a company with its debt securities selling on a yield of 26 per cent which managed to get off a hybrid issue at a yield of 6 per cent (1.5 per cent above the bond yield) with absolutely no current value from any ultimate conversion into the equities.

Rowley says the risk-taking behaviour has spilled over to the bond market. With a sudden swing from a low 10-year bond yield of 3 per cent to 4.6 per cent in a "quite extraordinary level of interest rate volatility", some companies have been able to raise money to survive at 5.5 per cent in the low rate period less than 1 per cent above the now risk-free bond rate.

"My concern is about the indiscriminate nature of that risk-taking," he says. But, while we know there will be an economic recovery, the big question is what does that mean in terms of pricing shares?

He is concerned that many cyclical shares now have "a pretty full recovery priced in" and many technology companies are perceived as growth companies but, in reality, many of them are volatile cyclical companies.

He suspects that, for technology hardware companies, the stockmarket is now assuming their normal profitability is something like they achieved in the bubble. But, looking at normal expected earnings, investors are paying very high multiples for companies with some growth and very, very volatile earnings streams.

Rowley cites Sun Microsystems which last month was selling at 48 times expected 2004 earnings; Juniper Networks at 86 times; EMC at 42 times and Yahoo! at 74 times expected 2004 earnings. "And these are not the worst cases," he says.

Nor are these trough earnings but estimated recovery earnings. The stockmarket seems to be assuming, he says, these companies' earnings power is going back to what it was in the past.

To demonstrate the hope in the market, he looks at Yahoo! which is at 112 times earnings and the market's best guess is that it could go to 74 times earnings.

Rowley says that today's marvellous, high cash generating companies are being priced at 30 times earnings and if Yahoo! wants to transform itself into one of these, it has to quadruple revenue to achieve its forward multiple.

Merrill Lynch Investment Management has concerns about how sticky profit margins might be in industrial companies where there is such a low level of usage. "People seem to have a mental model of the recovery, based on a mental model of recoveries in the past," he says.

But he argues that this downturn has not been caused by monetary policy but by an industrial recession caused by excess capacity. His concern is whether the normal, deep Vee-shaped recovery from a recession should take place in this case.

Consumption has dropped; if anything, Merrill Lynch's concern is that the low interest rates might have pulled demand forward.

"We don't doubt there is an economic recovery; our question is that this is a very different type of recession,"says Rowley, who is an economics graduate from Liverpool and a PhD in financial economics from London School of Economics.

In addition, there are still imbalances in the US trade deficit, a budget deficit, huge gyrations in interest rates and questions about what is the "clearing exchange rate" for the US dollar.

Rowley says the funny thing about the increased appetite for risk is that the low interest rates seem to divert money from cash deposits into junk bonds and then into risky areas in the equities markets. Rather than go into high yield stocks, the money seemed to flow into companies with no earnings at all.

He suspects that it points to a mood where people are looking for quick, speculative capital gains, judging from the pattern across the popular assets.

On the other hand, Rowley says there are many companies which have good value. "Large chunks of the market are fine." Microsoft is cheap, a number of drug companies are fine, and a number of financial sector stocks around the world are good. (That includes Australian banks and Irish banks, which are selling on multiples of only about nine times).

But for risky internet companies especially those ultra expensive Chinese ones and some technology shares, it's a case of "back to the races," he says.

The one consolation, he adds, is that it's not like it was during the bubble "when the whole stockmarket was off to lunch".