A recovery in the world economy appears sufficiently well-established to suggest investors should increase their exposure to riskier assets while traditionally safe assets such as government bonds are unattractive due to concerns about high public borrowing and inflation risks, according to HSBC Private Bank.

“We believe cyclically exposed equity sectors, corporate credit and hedge funds offer the best risk-adjusted value. The real growth story is in emerging markets, whose assets will outperform,” Fredrik Nerbrand, head of global strategy, said in the firm’s fourth-quarter outlook report.

Some investors have been so keen to increase their risk exposure that they have even looked to buy into parts of the hard-hit mortgage-backed securities (MBO) sector, Mr Nerbrand said.

More broadly, however, Mr Nerbrand said that while the global economy should recover, the burden of high public debt in many countries, such as the UK and US, will hamper growth potential. If, as he expects, interest rates rise to curb potential inflation, this will drag on growth.

“We believe this aggressive government monetary stimulus and fiscal spending will ultimately result in an unwarranted rise in money supply, but rather than causing consumer price increases, it is likely to drive asset price inflation,” he said.

Mr Nerbrand said his bank favours emerging markets, commodities and select commercial real estate. Emerging market currencies, such as the Chinese renminbi, are likely to appreciate against the US dollar in the bank's view.

HSBC Private Bank is positive on equities, preferring emerging market stocks and US equities, while euro zone, UK and Japanese stocks are less attractive.

On bonds, the bank prefers high-quality corporate credit to government debt and in the case of the latter group, prefers to hold short rather than long-dated maturities.