Investors should focus on capturing high yielding investments, protect portfolios against inflation and diversify assets to cope with an expected uncertain global economic outlook, according to Merrill Lynch Wealth Management.

Equities and commodities look better bets than government and corporate debt, while investors should focus on emerging markets, UK real estate and sectors such as oil and telecoms in equity markets, the US firm said in its 2011 forecast and strategy note yesterday.

With few viable forex alternatives to the dollar as a global reserve currency – the greenback and euro face downward pressures – investors are piling into “real assets” such as gold; oil and property. This trend will continue for a while yet, Bill O’Neill, chief investment officer for Europe, Middle East and Africa, told journalists.

“There is a limited risk that we see for a "double-dip" [recession], and we see recovery being sustained into the coming year, but that is where simplicity ends. Behind that, there are great tensions,” O’Neill said.

There are a number of risks to Merrill Lynch’s outlook, he said. On the positive side, US banking lending could accelerate faster than expected; China could agree to float its yuan currency and fiscal policy in the eurozone could be harmonised. On the negative side, the Bank of England could raise interest rates faster than expected, eurozone countries could default on debt, and the US Federal Reserve could lose credibility.

One issue for high net worth investors is finding assets which are uncorrelated (ie, do not move in parallel). Examining the rolling 10-year correlation of 12-month percentage changes in the S&P 500 equities index and US bonds, Merrill Lynch data shows that correlations are at the most extreme levels in 70 years (at almost -0.6), which suggests a reversal is likely. Throughout the 1990s, the correlations were positive.

Dividends will remain the main driver of equity returns, O’Neill said, and investors should look for dividend payouts from the larger emerging market companies in 2011. O’Neill also argues that UK commercial property will continue to offer a premium in yield over other real assets.

Among other details of O’Neill’s analysis, he noted that the smaller markets in emerging countries will outperform their larger peers, as happened in 2010. For example, since January this year, Columbia’s stock market has rise by 60 per cent, compared with China’s market, up by around 10 per cent, and ahead of India (more than 20 per cent)

Meanwhile, data shows that the value of the S&P 500 index of equities, in terms of ounces of gold, is at the lowest level since around 1990, having hit a high at the height of the dotcom boom.