EQUITY weightings of private clients' portfolios are expected to remain elevated relative to bonds going into 2010, in a sign of continuing optimism over global growth and, in particular, growth in Asia and the emerging markets.

Strategists are less upbeat on fixed income assets, citing a backdrop of possible interest rate rises as part of central banks' exit strategies.

So far, there are a number of common themes in their views: Prospects are brighter for emerging markets than developed markets. Brace yourself for volatility given the uncertainties over the shape and timing of central banks' exit strategies. And, be prepared to make more tactical shifts in your portfolio than you typically would in more 'normal' conditions.

Says Deutsche Bank Private Wealth Management lead strategist Christian Nolting: 'Stock markets have further short-term upward potential due to expected flows into the asset class . . . and the enforcing strength of the global economy due to the synchronised recovery in many countries.

'In terms of tactical changes we are recommending clients to reduce their bond exposure and further increase their exposure to riskier assets (equities, commodities and private equity) and alternative investments (hedge funds, real estate). In 2010, it will be vital to be dynamic in asset allocation, maybe even more than that in 2009.'

Pictet chief investment officer Bhaskar Laxminarayan echoes his counterparts' concern over how central banks will begin to withdraw the massive stimulus in the financial system.

'The environment has to go through rate increases, and money supply has to come down. These pose challenges. There has never been such a coordinated effort in terms of stimulus, or in such scale and magnitude. There is no textbook unwinding; the chances of making a mistake are quite high.'

He says the bank has recommended clients to 'partially reduce' equity exposures. 'We've taken some equity bets off the table, so we're neutral to slightly underweight equities.' Volatility, in any case, will create 'many opportunities to buy back into markets', he says.

BOA Merrill Lynch is one of the most bullish among analysts so far. In its recently released strategy report for 2010, it forecasts higher-than-consensus GDP growth, a bullish outlook for equities, a strengthening US dollar against selected currencies and a less attractive outlook for government and corporate bonds.

Ethan Harris, BOA Merrill Lynch head of North America economics and coordinator of global economics, said in a statement: 'We believe the global economy will gather momentum in 2010. We think the unprecedented mix of near-zero interest rates and high budget deficits will engineer an economic recovery that is real and sustainable.

'We aren't forecasting a swift return to robust growth. In fact recovery will likely lag behind those of previous recessions - but we believe the world economy will perform far better than the economic consensus would indicate.'

On emerging markets, the firm has picked as a key investment theme the region's consumers. 'EM consumers are at the very foundation of (our) secular bullish EM strategy. The EM consumer is at the beginning not end of the credit cycle. The emerging consumer is underleveraged,' said the firm's research and investment committee report. It cites mortgage debt in BRIC countries (Brazil, Russia, India, China) at just 9 per cent of GDP compared to 73 per cent in the United States, for instance.

Fund flows to date are testament to renewed optimism. EPFR Global, which tracks fund flows and allocations data, says emerging markets equity funds have bounced back from the blow dealt by Dubai World's debt problems, raking in net inflows in the first week of December.

In the year to date, net inflows have hit US$75.4 billion, well above the 2007 record inflow of US$54 billion. This is in stark contrast to the US$83 billion that has been redeemed from developed market funds this year.

DBS is likewise positive on Asian equities, even with their 60 per cent climb so far this year. 'With valuations and equity risk premia at neutral levels, we expect the index to be driven mainly by earnings growth in 2010. Abundant liquidity evoked by the low interest rate environment, loose monetary policy, rolling of fiscal stimulus, expectations for Asian currency appreciation, and USD weakness could drive markets further.' It recommends, however, a weighting of 44 and 41 per cent to equities and bonds, respectively. These are underweight, relative to the benchmark weighting of 50/50 for a medium risk portfolio.

Here are some key themes as seen by BOA Merrill Lynch, and how to play them:

• Government balance sheet risk: Soaring US budget deficit and China's currency revaluation are expected to drive 10-year US Treasury yields above 4 per cent. Favour US investment grade corporate debt over US Treasuries.
• Financial sector rehabilitation: Merrill economists expect short-term rates in the US to stay near zero in 2010. Look for credit opportunities among financials as corporate balance sheets improve.
• Rising global growth: Look for best-of-breed mega-cap multinationals based in developed markets with a large presence in emerging markets.
• Commodity price inflation: Supply constraints are likely to resurface. Merrill commodity strategist Francisco Blanch expects oil to break US$100/bbl by late 2010 and gold to hit US$1,500/oz over the next 18 months.
• Return of active management: Correlations among stocks have come down substantially since their 2008 highs. A stock-picking environment is expected to cause high quality stocks to outperform.