While continued balance sheet repair in the more over-indebted economies such as the US, the UK, Spain and Ireland will cap growth and inflation in the West, Greenwood projects a continued healthy recovery in the emerging world.

“In financial markets, the divergence between economic conditions in the developed and emerging universes will complicate the asset allocation process,” Greenwood said.

In the developed markets, where currently persistently low interest rates on deposits are likely to drive a continuing search for yield, investors may consider yield products such as corporate and high-yield bonds or “bond-like” equities that are perceived to be safe but offer a high dividend yield.

“In the emerging world, rising rates and inflation reduce the attractions of yield products, while on the equity side domestic demand stories could continue to benefit from strong economic growth, even though valuations may be high,” Greenwood said. Two alternative investment options could, he said, be explored: to buy emerging sovereign debt denominated in US dollars and to hold equities in developed economies which have high exposure to the emerging world.

According to Greenwood, the new crises that have erupted in 2010 – e.g. Greece and Ireland in the eurozone – are actually part of the process of exposing and recognising in accounting terms the true extent of the problems built up during the preceding bubble.

“The next step is to identify the range of entities among which the burden of losses must ultimately be shared – principally private shareholders, creditors and taxpayers,” Greenwood said. “In some cases the weight of outstanding obligations will ultimately require a restructuring of interest and debt repayment schedules, with corresponding losses for creditors. These processes will continue into 2011 and beyond.”

Marked by the experience of debt, banking and currency crises in the 1990s, the Asian and Latin American economies, in turn, preserved their healthy balance sheets during the past decade of bubble and burst in the western developed nations. As a result, recoveries in the emerging world have been far more vigorous than in the developed economies and have led to accelerated money and credit growth, rising asset prices and inflationary commodity price increases.

In a continually buoyant economic environment, Greenwood expects the emerging economies to spend much of 2011 addressing the consequences of these pressures – through currency appreciation, currency sterilisation or capital controls.