INVESTORS should use the recent correction to buy into markets, say strategists of two private banks. But banish the thought of a buy and hold approach, as volatility may well erase gains made during the year.

Says Credit Suisse Private Bank's chief investment officer Stefan Keitel: 'Buy on weakness, sell on strength. There will be two to three corrections in 2010 but also opportunities.

'We think the phase of market appreciation isn't completely behind us, but it's getting more volatile. From a strategic point of view, we have to focus on the cyclical and tactical calls.'

Deutsche Bank's Christian Nolting, lead strategist (Asia-Pacific), says that equity valuations had looked 'fair' in the beginning of the year, and now look 'more interesting' in Asia following the recent market pullback. 'We're talking of a proliferation of pullbacks. This will be the case in 2010. If you have positions with a gain of 10 or 20 per cent, be disciplined and sell. You'll have another pullback and another entry level. 'When we see that emerging market valuations are higher than developed markets, we'd cut down (the allocations). That might be a very promising strategy.'

The market correction over the last month has reversed the year's early gains, and on a year-to-date basis, most markets are in the red. Some emerging markets are down by more than 10 per cent. EPFR Global, which tracks fund flows, reports that emerging markets saw the worst outflows in 24 weeks in February.

Still, redemptions from money market funds continued despite the uncertainty. 'The fact investors have pulled nearly US$80 billion out of this fund group during the first month of the year suggests the desire to put money to work rather than simply keep it on the sidelines,' noted EPFR senior analyst Cameron Brandt.

The consensus view is bullish on emerging markets in the medium to long term, as their share of global GDP is expected to rise from the current significantly over the next five years.

Mr Keitel says that the current average portfolio allocation to emerging markets for a global investor is about 10 per cent. This could rise to 30 per cent in five years. 'That means a strong call to use dips to build positions,' he says.

He adds that the current market weakness could be an 'excellent' buying opportunity, as emerging market stocks are expected to deliver a 'sub-par' performance in the near term, due to momentary strength in the US dollar.

Some of the positive underpinnings to a buy stance are: 'The macroeconomic environment continues to improve; valuation readings are already back in undervalued territory thanks to growing corporate profits and the latest markdowns in share prices; markets are oversold; and there are few viable investment alternatives.'

Mr Keitel says that markets are unlikely to re-test previous lows. 'We're pretty convinced that we're not back in a sustainable bull market . . . We think that over the next one to three years, the cyclical markets with sideways volatility will go on. But we do have some supportive elements . . .

'Risky assets are well backed up and there is limited downside. (Investors) who missed the rally in 2009 will try to step back into the market for more healthy strategic allocations.'

At least half of investors' portfolios, he adds, should be actively traded - 'tactically focused on buying on weakness and selling on strength on a disciplined level'. Credit Suisse remains 'moderately overweight' on risk assets, particularly equities and corporate bonds. It also has an overweight call on gold.

Deutsche Bank believes that with the transition to an 'alpha' market where there will be differentiation within and between asset classes, one way to take advantage is through 'pair' trades. This means to long one stock, asset class or market, and short another.

One example of differentiation is in markets where the corporate bond yield is lower than the dividend yield, says the bank's global chief investment strategist Helmut Kaiser. Investors could sell the bond and buy the stock and benefit with a higher income stream.

Deutsche Bank has also raised its model portfolio's allocation to alternative investments to a high of 30 per cent, compared with 20 per cent in February last year. 'We need to be dynamic in asset allocation. But from a risk/return perspective, we don't want to take on too high a risk profile,' says Mr Nolting.

He expects developed equities to deliver between 10 to 12 per cent in returns this year, and emerging market equities could deliver more.

The outlook on sovereign bonds, however, is cautious, although corporate bonds still offer opportunities. Mr Nolting says: 'We're not bullish on sovereign bonds . . . We have to make sure clients are not caught on the wrong side; rate movements can be quick. Supply of Treasuries is huge in the US.'

Mr Keitel says that supply of corporate paper is expected to rise as well, although the outlook for bond returns is poorer for 2011 than for 2010. 'The expected return on bonds is usually the coupon plus capital appreciation driven by shrinking yields. Now it's the coupon minus price depreciation driven by a moderate rise in yields. That's our expectation for 2011 and beyond.'