With the year 2009 behind us, attention has turned to the outlook for 2010. Dr Prieur du Plessis, Plexus group chairman, sheds some light on his investment team?s thinking regarding prospects for the global economy and financial markets?

The year of 2009 will be remembered as a year of contrasts. The year started with a devastated world economy. Liquidity had dried up as financial institutions turned their backs on each other and on clients owing to the uncertainty about their ability to survive the crisis. Financial markets were sold down to ridiculously low levels, leaving investors with huge capital losses. Central banks issued rescue packages to large financial institutions, cut interest rates to almost zero and reverted to quantitative easing and other troubled asset relief programmes to reduce the systematic risk in worldwide financial systems.

The year ended with strong indications that central banks' emergency measures have been successful. Most financial institutions survived; there are strong indications that the global economy is emerging from the recession and equity markets, especially emerging markets, have delivered exceptional returns for investors who were willing to take some risks.

However, investments are not based on the results of the past year, but on future opportunities.

Growth, inflation and interest rates

Economists and market analysts are divided on the sustainability of the global economic recovery and the prospects for global economic growth in 2010. As long as uncertainty prevails, inflation remains subdued and central banks keep interest rates low while maintaining most of the emergency measures, liquidity will remain high. We believe the current level of liquidity is too high and the greatest risk to the financial system lies in these excessively high levels of liquidity that could ignite and fuel inflation to very high levels. At the same time we also believe the high levels of liquidity and inflation may offer the best investment opportunities in 2010.

The situation could change late in 2010 if the global economy returns to higher growth rates, or when worldwide inflation increases. This would leave central banks with no other choice but to withdraw the existing emergency measures and increase interest rates to reduce liquidity.

Exchange rates

The current weakness in the US dollar and the GBP is undoubtedly the result of the low interest rates and high levels of liquidity in the US and UK financial systems. This dollar and GBP weakness should continue as long as interest rates remain low and liquidity high.

Investors should therefore limit their offshore exposure to the US dollar and the GBP in favour of currencies such as the euro, yen and emerging-market currencies. Investors can expect the US dollar and the GBP to strengthen later in 2010 if the US and the UK start to increase interest rates.

The offshore exposure should then be realigned to a more balanced exposure.

Article continues on page two and three: commodity-, equity- and property prices as well as the outlook for interest bearing instruments...