×

Investing 'Minefields' to Watch for in 2011

The global economic recovery may be firmly on track, but Arjuna Mahendran, head of investment strategy for Asia at HSBC Private Bank, recommends that investors safe guard their portfolios against two central risks this year: inflation and the burgeoning government deficits.

"Protecting is going to become a key issue, protection against inflation, protection against ballooning government debt...We're certainly entering an era where we're really not equipped to handle some of these issues because the hedging tools in the market simply aren't there," he told CNBC.

All major economies including the United States, Japan and the European countries are going to see a progressive increase in government debt, he noted. "Who is going to buy this debt, what's going to happen eventually and how are we going to turn the corner?"

While these factors are set to influence markets in 2011, Mahendran believes the risks will become even more apparent next year. "2011 will be a year we borrow growth from 2010, so the problems are going to be back ended into 2012."

Commodities: A "Big Minefield"

Contrary to many market watchers who are forecasting a positive year for commodities, based on the global cyclical recovery and supply constraints, Mahendran believes the sector is a "big minefield".

He cites gold as an example of a commodity that has demonstrated an unsustainable run-up in prices. The precious metal rose almost 30 percent over 2010.

"At some point the ladies in India who buy jewelry every autumn are just going to stop doing so. They are going to prefer to pawn that jewelry because food prices are going up and they have to feed their families," he said.

"If that demand-supply imbalance starts manifesting itself, what will happen to the price of gold? It doesn't seem to me obvious that it's just going to keep rising forever."

The tipping point would be if oil prices hit $120 a barrel, Mahendran added. "I don't foresee that happening, but if we do that is a big warning signal for the global economy," he cautioned.

Comments? Questions? Send them in here.

Catch "Protect Your Wealth" on CNBC's Asia Pacific network every Tuesday on "CNBC's Cash Flow," Wednesday on "Asia Squawk Box" and Thursday on "Capital Connection."