GLOBAL - The last 12 months has seen a significant amount of volatility in investment markets, starting the year with large market falls but ending with a mostly strong recovery. But what do the industry experts predict for 2010?

It seems that most believe the recent improvement in stock markets is not enough to signal the end of the crisis.

Ana Armstrong, co-founder of multi-asset firm Armstrong Investment Management, says that investment is the true engine of sustainable recovery, and that the current level of 11% of US GDP represents a 60-year low.

"That lack of investment, unacceptable levels of unemployment, and ballooning government debt will put a lid on the potential for a sharp and significant recovery, and for these reasons we are firmly in the ‘W-shaped' camp," claims Armstrong.

David MacEwan, fixed income CIO with American Century Investments, added: "We are seeing, and expect to see, higher volatility across the US Treasury and swap markets. Getting that volatility right is key for asset-liability management."

On the issue of interest rates PIMCO's Bill Gross said: "Raise interest rates with 15 million jobless? All because gold is above $1,100? You must be joking. We will need another 12 months of 4-5% nominal GDP growth before Bernanke and company dare lift their heads out of the 0% foxhole - mini-bubbles or not."

And on the European front Laurens Swinkels, a senior researcher in quantitative strategies at Robeco who used to crunch numbers for ABP Investments, warned a fall in interest rates could hit Dutch schemes hard.

"Increased volatility of interest or swap rates should make pension funds even more careful about moving assets away from liabilities: if the recovery turns out to be weaker than expected and interest rates go down again, some Dutch funds could end up back below the 105% coverage ratio," said Swinkels.

"We see rates on hold through next year in the UK," says LGIM's chief economist Tim Drayson. "Quantitative easing has probably come to an end, but I don't think they'll be selling gilts back into the market next year - or ever, in fact."

He added: "A correction in equities might cause a temporary drop in yields, but people will soon realise that government bonds are not safe for the longer-term. That's not de-risking: the government has taken on all of the debt of the private sector - you'd just be following that risk."

Meanwhile corporate balance sheets are being repaired, often via equity issuance according to Michael Hintze, CEO at credit specialist CQS. "That has had the effect of diluting equity and making the credit much safer. Ultimately we are set up to see credit spreads continuing to grind in while equity markets do nothing."

But for those specialising in currency trading, "2010 is shaping up to be a particularly interesting year," claimed Castlestone Management FX fund manager Brad Yim. "Country-specific fundamentals set the tone in an environment where gyrations in investor appetite will periodically affect violent moves. Persistent high volatility would make holding long-term trades more difficult, and drive up the price of options that are often used as hedges."

"On the other hand, large moves can also provide attractive short term trading opportunities for the more agile. The smart way to trade in such environment is to maintain a lower risk exposure and employ tactical trading to take advantage of extreme short term price swings."

Elsewhere Morgan Stanley's UK equity strategist Graham Secker puts a 30% probability on the FTSE100 re-testing the lows of March 2009, while Credit Suisse's global equity strategist Andrew Garthwaite suggests that "the macro environment will decide 2010, and investors in sovereign debt will probably decide the fate of risk assets."

And Nick Hamilton, head of equity products at Invesco Perpetual, highlighted: "Brokers tell us that participants buying financials and materials often did so without a strong fundamental conviction. We're resigned that here may be one last big squeeze into these stocks - but that doesn't make them the ones to own longer-term."

However Richard Urwin, head of investments in BlackRock's fiduciary mandate team, warned: "If we think of recovery as ‘the return of the feel good factor', a lot of people at the end of next year will be asking, ‘Recovery? What recovery?'"

More insight from these commentators can be found in the January edition of IPE magazine, available in the New Year.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email