In a presentation in Hong Kong yesterday, Philip Jehle, head of the private client unit for Asia at Lombard Odier, advised investor caution on equity markets, including China, but he is upbeat on gold for the coming year.

The Swiss private bank believes a sustainable global recovery requires addressing imbalances in the system -- that is, debt restructuring -- says Jehle, adding that the current rebound in the market is fuelled by stimulus packages, which cannot be implemented forever.

Withdrawal of government stimulus must happen at some point, and unless demands for goods pick up, the recovery will slow down. Currently, there are no signs of recovery in consumer demand, he says, and the unemployment rate, particularly in the US, remains high. That is an even worse situation for a population that traditionally spends the most money.

Moreover, US banks have written down losses of $665 billion as of November, and could potentially write down a total of $1.1 trillion, according to Bloomberg and Lombard Odier estimates.

The upshot is that stock markets are now entering a new phase, in which returns will be lower, due to new rules applied to the financial industry and partial nationalisation of economies, says Jehle.

While acknowledging that the current momentum still favours a stronger market, he predicts that a 20-30% correction could occur in emerging markets and a 20% correction could happen in the developed world. These corrections would bring markets back to the mean level, Jehle adds, which is more healthy.

With regard to emerging-market equities, Lombard Odier's view is that they are overvalued at the moment, but that investment opportunities exist in fixed income as markets head into a deflationary environment. Jehle expects bond issuance in Asia to continue into 2010.

Moreover, despite strong growth in China, the firm remains cautious on that market, as stimulus measures are causing asset prices to increase, creating a volatile environment. Jehle says the country needs to be careful with its printing of money, as a portion of the capital is flowing into less productive asset classes in terms of boosting the economy, such as properties and equities.

One area where Lombard Odier is more upbeat is gold; the firm is overweight the physical metal, mainly down to its use as an alternative currency. Jehle points out that investors are questioning the value of paper currencies.

In addition, central banks and sovereign funds are also keen to diversify their holdings, he says, and therefore demand for gold will gradually increase. As a result, the price of the metal could correct to $1,100 and could rise to $1,500 next year, with a 20% return probable in the next year. Other firms in the market have cited a similar view in recent months.