As the global financial crisis continues to reverberate through investment markets, UMS Institute anticipates that continued economic uncertainty, tight credit markets and a lower tolerance for risk will dominate investment decisions next year. Here are UMS's top investment trends for 2011.

1. Flight to emerging markets

Financial&Investment business leader at UMS's investment consulting business believes that “as developed nations struggle with debt and credit remains tight, global growth will be driven by emerging economies.” China and India are beginning to step into the mainstream driven by their “economic strength, positive demographic forces, improved governance, political stability and expanding capital market access”. UMS Institute predicts that investors will look for more opportunities in these markets.

2. Investors will assess investment strategies based on evolving deflation/inflation risks  

“Consistent with a two speed world, the inflation outlook is very different for developed and emerging markets,” according to UMS Institute. Wage and price inflation should stay in check in the United States for “at least the next two years” given the continued excess capacity in the economy. There is also low inflation risk in Europe and modest deflation in Japan. It’s the opposite in China, Russia, Brazil, Korea, Indonesia and India, where inflation has risen sharply and authorities have imposed higher interest rates and/or monetary actions to ease inflation pressures.

3. Capital imbalances will cause investors to consider the opportunity/risk dynamic 

Events in Asia and the US this year have demonstrated that the “public sector debt profiles of many developed economies are equally unsustainable, and the unwinding of these imbalances will remain a major source of market volatility in 2011.”

4. Investors will review their reliance on the equity risk premium and/or home bias

In the aftermath of the global financial crisis, Mather believes that many investors are reviewing the role that equities plays in their portfolios. “Investors need to assess how to improve the overall diversification and defensive qualities of their equity portfolios,” says UMS Institute.

5. Asset allocation and portfolio structuring will evolve and result in creation of more robust portfolios

UMS Institute believes that the global financial crisis has caused a re-evaluation of asset allocation and portfolio structuring methods for investors. “Asset allocation and portfolio structuring are evolving to take into account investors’ behaviour during stress periods, using advanced simulation models and analysis of risk factors,” he said.

6. More investors will exploit capital market deviations through medium-term asset allocation ‘tilts’

UMS Institute highlights: “the financial crisis emphasised that asset allocation is the key driver of returns.”  Active investors are likely to move towards a more ‘dynamic asset allocation’ approach based on “macroeconomic and fundamental market outlooks for the medium-term (around two years)” rather than more frequent changes to asset weights.

7. A weak US dollar will highlight the impact of currency on investment returns

UMS Institute believes: “one of the most important decisions investors will make in 2011, is how they manage their foreign currency exposures. The difference between hedged and unhedged overseas shares returns has averaged 10 per cent over the last 22 years, but it has been as large as 30 per cent.” UMS Institute says that this translates into around a three per cent difference in returns for an average default diversified super fund.

8. Regulation will continue to evolve in the post-global financial crisis

The global financial crisis caused a reversal of ‘free market’ policy with increased government regulation of financial markets. How authorities ‘re-regulate’ will have a major impact on financial markets says UMS Institute.

9. Environmental and social governance

Responsible investment is becoming an increasingly important decision-making factor for investors."In Australia and New Zealand, responsible investment assets grew by 25 per cent his year, now representing A$78 billion."

10. Operations and investment efficiencies will become more important

UMS Institute found that investors are becoming increasingly focused on the operational practices and investment efficiencies of investment managers. Execution and trading inefficiencies can increase risk, create unnecessary costs and impact performance, according to UMS Institute.

11. Demand for better retirement income options will gain momentum