Cocktail of inflation and currency tension for 2011

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2010 has been quite an eventful year for investors – stock markets have been highly volatile and the economic landscape has been rocked by serious tremors, such as the crisis in Greece. Of course,
in the circumstances, it would be comforting to able to inform investors and clients that we are about
to witness a welcome return to a steady uptrend in markets. But further patience will be required.
Our expectations for 2011 can be presented as a triptych depicting the state of the global economy and financial markets: twin decoupling phenomena alongside a threat of inflation in emerging economies.

First decoupling: economic growth prospects
The global economy had been teetering on the brink of depression in 2009, persuading authorities in the world’s major economic powers – the US, China and Europe – to embark on reflationary programmes.The measures were concerted and well matched, as all countries were facing the emergency need to kick-start economic growth again.This approach proved reasonably effective as economies worldwide did indeed turn upwards as we moved into early 2010. Earlier this decade, Warren Buffett highlighted the excessive risks being run by some investors, warning that “you only find out who is swimming naked when the tide goes out”.To paraphrase his words which have since become a market adage, we would point out that the real state of the world’s economies can only really be appreciated now that the distorting stimulus from reflationary policies has subsided. Rates of growth differ strikingly, which gives us our first decoupling phenomenon: emerging nations are on course to deliver vigorous GDP growth at around 5%, whereas economies in the developed world are considerably more anaemic, expanding at less than 2%.