THE world escaped from a financial meltdown and a new Great Depression more
easily than many dared hope in 2009. Asia in particular bounced back faster
than expected, thanks largely to huge fiscal and monetary stimulus in China.

The situation in the world's most advanced economies was also stabilised by
massive government spending, financed largely by central banks printing money.
Will 2010 be a year of further recovery, fuelled by reviving private demand,
or will it be the 'year of reckoning' when double-dip recession and deflation
appear, and when debts shifted from the private to the public purse have to
be paid?

The Business Times assembled a panel of eminent and seasoned experts to review
economic and investment prospects.

Anthony Rowley: Welcome to this year-end Investment Round Table as
we gather for the last time in 2009 and look ahead to what lies in store in
2010 - the Year of the Tiger in the Chinese zodiac. Some say it is a good year
for taking risks, and there seems to be no shortage of those. Prof Sakakibara,
would you begin the crystal-ball gazing and tell us what lies in store.

Eisuke Sakakibara: 2010 will be a very difficult year. Among developed
countries, including the United States, the economy will be very weak and there
is even a possibility of a double-dip recession. In the case of Japan, the
likelihood of a double-dip recession is around 50-60 per cent. The situation
(in Japan) is very bad at this moment. In the US case, fiscal stimulus will
probably continue until the summer of next year but around the end of the year
there is a possibility of a double-dip recession. Europe too has a very serious
situation. Being a collection of countries, the situation is even more difficult
than in the US. European countries have separate policies and economic conditions
are different, yet monetary policy is unified.

Deflation is going to continue, not only in Japan but also in the US and Europe,
and it may deepen. The so-called 'Japanese disease' is going to be a major
malaise among developed countries. The problem is that it's not a monetary
phenomenon - it's a structural phenomenon arising mainly from globalisation.
So it's very difficult for central banks to control and it will take a long
time to work its way through the system.

William Thomson: I agree that the crystal ball is cloudier than usual.
The global economy did indeed escape a cataclysmic collapse of the financial
system a year ago and the heart attack was treated with previously unthinkable
doses of adrenaline in the form of unorthodox monetary and fiscal policies.
After a lag the patient has returned to consciousness but is in far from rude
health.

In many ways, the developed world is suffering from what Japan has suffered
from since its bubble burst. Much as has happened with Japan since 1990 - good
years have followed bad only to relapse into further bad years, I expect the
efforts made in 2009 to show fruit in 2010 with decent positive growth in OECD
countries. The real question is the sustainment of that recovery into 2011
and beyond, as and when stimulus measures are gradually withdrawn. For the
US, 2.5 per cent growth is certainly possible after almost two down years.
But the recovery will be tepid as consumers still have to rebuild battered
balance sheets and unemployment will stay unacceptably high - about 18 per
cent, if you include part-time and discouraged workers who wish to work full
time. The outlook for 2011 is even less certain with tax increases expected
to take effect and be a drag on growth.

The UK should be much the same with concerns that the incoming Conservative
government will slow things further by slashing government expenditure to set
course for a healthier economy in four to five years' time. A double-dip recession
is a real possibility for the UK. Europe will be mixed, with France and Germany
moving ahead, while others struggle with indebtedness.

Asia, as usual, will be the bright spot with China and India the stars moving
ahead at 6-8 per cent, but with rapidly increasing concerns in China about
overheating and bubble formation. I expect there to be inflation scares, especially
early in the year when comparisons are made with last year's low prices for
oil and other goods, but overall it should be contained in 2010 with real concerns
rolled forward to 2011 and 2012.

Ernest Kepper: 2010 will be a year of severe economic contraction.
The (overall global) economy will not improve in the next six months, with
high unemployment, the US federal budget deficit, and an increase in taxes
as the top concerns. Massive injections of central bank liquidity have prevented
the collapse of financial markets, but have done little to ease the de-leveraging
of households or stimulate activity in the broader economy. The fiscal strangulation
of the millions of people who are no longer considered 'creditworthy' is progressively
weakening demand and spreading pessimism across all income levels, even as
the US shows signs of moving from recession to recovery. Forced personal thriftiness
is reducing economic activity and strengthening deflationary pressures, leaving
many families with little to spend at malls.

Debt deflation and de-leveraging will continue into 2010, while foreclosures,
personal bankruptcies and defaults continue to mount. The credit collapse and
the accompanying deflation and overcapacity are going to drive the economy
and financial markets in 2010. Perhaps inflation is a consensus forecast but
deflation is the present-day reality and often lingers for years following
a busted asset and credit bubble of the magnitude we have endured over the
past two years.

The maximum impact of the stimulus has already been felt, and additional stimulus
will be no more than US$200 billion, of which a mere US$50 billion will go
towards jobs initiatives. At the same time, Fed chair Ben Bernanke will terminate
the quantitative easing programme which kept long-term interest rates low while
providing financing for the housing market. When the programme ends, rates
will rise, housing prices will tumble, and liquidity will drain from the system.
The end of quantitative easing coupled with dwindling stimulus ensures that
economy will slide back into recession in the second or third quarter of 2010.

Rowley: Very sobering thoughts. But I think others see a little more
good cheer. What about you, Mark?

Mark Mobius: I think 2010 will be a year of recovery. Company results
and country economic results will be better than in 2009, although not as good
as 2008. Employment will gradually improve but companies will focus more on
productivity and thus will not engage in exuberant hiring. Inflation will not
come back immediately but will gradually move up by the end of the year, provided
that the money printing presses continue to roll.

Robert Lloyd-George: I also think that 2010 will continue the economic
recovery which has begun in the last few months of this year. Our macro forecast
shows a strong turnaround in the Asian economies from negative growth last
year in Hong Kong, Japan, Korea, Malaysia, Singapore, Taiwan and Thailand,
to an average of 4 per cent growth in 2010, and an acceleration in growth in
China from 8.3 to 9.5 per cent, India up from 6.1 to 7.5 per cent and Indonesia,
from 4.5 to 5.5 per cent.

But we see inflation rising everywhere, with the possible exception of Japan,
and reaching double digits in India and Indonesia in the second half. Although
China currently anticipates its CPI to rise by under 3 per cent, our private
forecast is for it to exceed 5 per cent by the summer (rising food prices are
a major factor). Employment figures will continue to improve in most countries,
even in the USA, where we expect (President) Obama to produce a second large
stimulus programme before the midterm elections in November.

Rowley: How great are the dangers of fiscal crises erupting in 2010
and what would be their impact on the wider investment universe?

Lloyd-George: My biggest fear is indeed a crisis in one of the major
bond markets - Japan, the UK or the US, or one of the weaker countries of the
European Union such as Greece, because debt-to-GNP stands at between 100 and
200 per cent and fiscal deficits are unsustainable, and perhaps un-financeable.

It is however possible for a country to continue for an unexpectedly long
period with large deficits and finance them from domestic savings. (Japan is
the prime example). However I do expect that bond yields will rise from their
very low level during the next 12 months and that this could have an impact
on equity markets.

Mobius: We are already seeing fiscal crises in Greece, Portugal and
Dubai. There will be other countries all over the world which have found it
necessary to expand spending could have problems in balancing budgets. The
impact will be a heightened sense of vulnerability and a desire to move to
'safer' investments.

Sakakibara: I would not call it a crisis yet but if it continues on
as it is now that would be a major problem for Anglo-Saxon countries in two
or three years. They have to start thinking about exit policies. In the US
and UK, there is a fiscal problem but in the case of Japan I don't see any
problem in the short run because although the accumulated government debt is
very large - around 170 per cent of GDP - accumulated household savings are
equal to 280 per cent of GDP. We could expand fiscal policy probably to avoid
a double-dip recession. This would involve issuance of government bonds but
they would be absorbed by the markets. There is abundant liquidity and risk
aversion is widespread, so lots of demand for government bonds.

Thomson: As we have seen recently with Dubai, Greece and Spain, fiscal
crises can be expected to occur during the course of 2010. Whilst they may
give plenty of jitters, and there will be further downgrades, it is more likely
than not that EU countries will work their problems out. There will be talk
about countries leaving the euro but I do not believe it will happen in 2010.
The solutions are likely to be draconian and only increase unemployment further
leading to social unrest. The UK is on a path to a ratings downgrade unless
it cuts its deficit and moves to a more credible fiscal path. A Conservative
government, if it is elected next spring, will try to begin that process at
the cost of massive unpopularity as programmes are cut and taxes increased.
Re-election of Labour could see the UK headed back towards the IMF as happened
in 1976. The US faces similar dilemma and massive middle-class tax increases
may be voted for 2011, including a substantial capital gains tax increase.
These should have a negative effect on the US market as 2010 progresses.

Rowley: So what does all this mean from the point of view of bond-market
investors? What are the attractions, if any, of fixed-income markets, and where
are interest rates headed in 2010?

Sakakibara: Fed chairman Bernanke has said that he will maintain a
low interest rate for some time to come and I think that will probably be necessary
because the recovery is very weak in the US and the same thing could be said
about Europe. In the case of Japan, I think that again the low interest rate
policy will be continued. (Generally), I would not see any major hike in interest
rates until late next year. Maybe after next summer, if the recovery is robust,
there is a possibility for example in the US of the Federal Reserve raising
rates but that's very uncertain. Deflation will continue, and that is bad for
bonds.

Mobius: Interest rates will probably edge up in 2010 and the attractions
of the fixed-income markets will come down to logical levels.

Lloyd-George: The only fixed-income markets that I think are attractive
are Australia and Norway. Interest rates will go up nearly everywhere.

Thomson: I am not a fan of fixed-income markets believing there to
be an oversupply of sovereign credits and the 30-year bull market has essentially
come to an end. I believe we are still facing a version of the 1970s stagflation
and, indeed, governments, especially the US and the UK, would like to see some
inflation in the system to reduce the overburden of the outstanding debt. At
some point, possibly in late 2010 and no later than 2011, interest rates on
10 to 30-year US Treasuries will begin to reflect these facts and move higher.

Rowley: What about currencies? Prof Sakakibara - or perhaps I should
call you 'Mr Yen' in this context - what do you see?

Sakakibara: I think that the yen will probably appreciate towards 80
in terms of the dollar and 120 in terms of the euro or even 115 or 110. Japan
can live with that although it would be a very difficult situation for some
exporting companies. As for the dollar, there has been a slow decline of the
dollar for some time against all currencies but now the euro has weakened a
little. So in terms of the euro, I think it will be par but against other currencies
the dollar will probably decline. I think the US government is supporting a
gradual decline of the dollar and the US balance of payments situation is improving.
I am not seeing a crisis for the dollar - whether (its descent) is controlled
or not I don't know but the US welcomes this development. Some of the Asian
countries are shifting from the dollar to the euro or to gold and that is generating
a gradual decline of the dollar.

Kepper: The unwinding US dollar carry trade is the most dynamic trend
for 2010 where financial crises could erupt. Basically the US dollar carry
trade consisted of going short the US dollar and long on very highly leveraged
equities and commodities. This direction of change could be very significant
as it could result in the US dollar rising sharply against most currencies,
especially the commodity-related ones with the drop in prices of equities and
commodities.

Rowley: Now let's turn to equity markets - emerging and developed.
Where do you see these going in 2010, and why? Let's start with you, Mark.

Mobius: Equity markets simply will go up, because liquidity in global
markets is so high and because emerging economies are growing so rapidly.

Lloyd-George: We expect that emerging markets (Brazil, India, China,
perhaps Indonesia) will continue to outperform on the basis of strong commodity
prices, strong economic growth, political stability and stronger currencies.
They all have healthy foreign exchange reserves and a surplus on trade. Much
of the improvement in the developed markets in the US and Europe has already
happened, although I would venture a guess that the good multinational blue-chip
companies, such as Coca-Cola, Johnson and Johnson, IBM, are still very undervalued,
relative to world markets.

Sakakibara: The performance of US corporations is improving but at
the cost of layoffs. Unemployment is rising and consumption is very weak. Still
corporate performance is relatively good so I would not expect any major decline
in the New York Dow Jones index. The Nikkei average (in Japan) will probably
decline.

Thomson: To paraphrase John Pierpont Morgan: Markets will be volatile.
Markets have bounced back impressively - as they did in 1930 only to relapse
in 1931 - since their March lows and are overvalued on many fundamental criteria.

This reflects a certain flight from cash as governments have gone on a wilful
binge printing with abandon. A pause, even a reaction, here would be healthy
to allow fundamentals to catch up with prices. There is plenty of cash on the
sidelines waiting for such a reaction, which should contain the downside.

There is a chance that this will happen since we see some firmness in the
US dollar, reflecting problems in the euro zone and some at least temporary
cooling in commodity prices. This, I believe applies to both developed and
emerging markets. Emerging markets are no longer cheap but they still have
superior growth prospects to developed markets and they have undervalued currencies,
so there is a double play there. Developed markets will be affected by the
prospects of tax and interest rate increases.

Rowley: What about the outlook for gold, and also for other precious
metals and commodities in general?

Lloyd-George: I have been continuously promoting investment in gold
for several years. I expect in the short term it will reach US$1,300 per ounce,
and will reach US$5,000 per ounce over the next three to five years. This price
(by 2014 or so) would imply a collapse of faith in the dollar and eventually
a political crisis leading to a restoration of the gold standard in some form.
Other commodities will continue on their upward path also until 2014, especially
the lagging soft commodities, such as corn, wheat, sugar, rice, beef, coffee,
soya beans and palm oil (cocoa, today, is at a 25-year high).

Other precious metal prices such as silver and platinum will outperform gold
and I expect copper and the industrial metals will remain strong as long as
China's infrastructure spending continues and India's follows.

Mobius: The outlook for gold and all commodities is good and we expect
high prices (over time) but (the rate of) price rises will be moderate.

Sakakibara: There will be some selling of gold if it goes towards US$1,500
so I would not anticipate a continuous rise in the price. I am not seeing a
crisis for the dollar - whether (its descent) is controlled or not I don't
know but the US welcomes this development. Some of the Asian countries are
shifting from the dollar to the euro or to gold and that is generating a gradual
decline of the dollar. That is going to continue.

Thomson: Gold is also not as cheap as it was but I expect it to continue
to gain credibility as the only asset that is not someone else's liability,
that is, governments cannot print more gold - although I should note that there
are a growing number of scams in the field and it is rumoured that a considerable
number of tungsten-filled bars are circulating and some have been found in
central bank vaults. So care in buying physical gold is essential.

Gold now has a new class of buyer: central banks. India has made a major purchase
from the IMF at US$1,050 an ounce and it should act as a floor. China is adding
to its reserves from its domestic production. It owns 1,000 tonnes but the
US owns 8,000 tonnes and the EU 12,000 tonnes. With China becoming the second
largest economy in the world and probably No. 1 by about 2025, it is reasonable
to assume China would aim to own between 5,000 and 10,000 tonnes in 15 years'
time. Other Asian countries have too many paper dollars and too few tonnes
of the yellow metal. That is long-term support for the metal and supports arising
price. Silver is underpriced relative to gold and so makes an interesting addition
to portfolios. Gold and silver shares are interesting on any pull-back (in
price) since they are still selling the same price as when gold was US$800
two years ago.

Kepper: Gold is operating on its own particular set of global supply
and demand curves and should be an outperformer, especially when the next down-leg
in the US dollar occurs. Gold should be bought and held for at least three
to five years, as we are at the beginning of a new cycle for gold accumulation.
The long-term trend is still up for the price of gold.

There are two basic motivations to invest: greed and fear. As more and more
defaults occur from real estate, corporations, and governments in the next
few years, trust in domestic and international financial systems alike will
diminish as it becomes obvious that there are insufficient funds to service
large amounts of outstanding debt that was issued over the last decade, and
the price of gold will rise without any real inflation present. Then inflation
begins, and as the price of gold continues to rise, fear is replaced by greed
as the primary reason to hold gold bullion.

Gold-mining stocks are riskier than owning bullion as there are dangers from
fire, flood, resource depletion, and nationalisation. But as gold prices climb,
so do the prices of stocks.

Moreover, many gold stocks average 15 per cent dividends. If your net worth
is between US$100,000 and US$1 million, 25-50 per cent of your assets should
be in gold and silver. Of the gold, a rough breakdown would be 60 per cent
in bullion and coins, 30 per cent in gold mining stocks, and maybe, if you
have the appetite, 10 per cent in penny stocks.

Rowley: What about other investment opportunities in 2010 - real estate,
for example?

Mobius: Emerging markets still represent the best opportunities in
my view.

Lloyd-George: Real estate is certainly an interesting area given my
inflation outlook, but it is of course a local phenomenon. The Asian real estate
markets will do best, although I, like others, am concerned about the development
of a bubble in Beijing and Shanghai, where prices are already very high. The
easy availability of capital and of mortgages and low interest rates will continue
to support strong property prices in Hong Kong and elsewhere, as well as the
weakness of the US dollar. I noticed on my recent trip to China a 'land rush'
similar to the 'gold rush' which we see in other communities around the world.

Thomson: Residential real estate in the US is a bargain for patient,
cash-rich vultures. Commercial real estate, on the other hand, is a slow-motion
train wreck. Residential property in the UK is still expensive and despite
the hurrahs of the industry has probably got some way to go on the downside
as unemployment increases and financing remains challenging for first-time
buyers. Asia, however, is a bubble in formation especially China and Hong Kong.
The authorities are aware of the problem and are increasing down-payments but
may be behind the curve. Foreign investors may have a double whammy of higher
prices and higher local exchange rates.

Kepper: In order to preserve wealth and manage risk, I believe the
dominant focus should be on capital preservation and income orientation, whether
in bonds, hybrids, hedge fund strategies, and a consistent focus on reliable
dividend growth and dividend yield would seem to be in order ever off the commodity
sector.

Rowley: Let me close by wishing our panellists - and all of our readers
- a happy - and hopefully prosperous - New Year.

William Thomson, Chairman of Private Capital Ltd., an advisory company in
Hong Kong. He is also a director of Finavestment, London.

Mr. Thomson is not a registered advisor and does not give investment advice.
His comments are an expression of opinion only and should not be construed
in any manner whatsoever as recommendations to buy or sell a stock, option,
future, bond, commodity or any other financial instrument at any time. While
he believes his statements to be true, they always depend on the reliability
of his own credible sources. Of course, we recommend that you consult with
a qualified investment advisor, one licensed by appropriate regulatory agencies
in your legal jurisdiction, before making any investment decisions, and barring
that, we encourage you confirm the facts on your own before making important
investment commitments.