After such a strong recovery in 2009, volatility could be the defining characteristic of early 2010, according to Dean Cheeseman, head of multi-manager at F&C Investments.

Cheeseman, who heads the team in charge of F&C’s risk-rated Lifestyle Funds range, as well as its more traditional multi-manager funds, said investors could become more wary as asset prices move upwards and the fragile economic recovery gains traction.

'Liquidity could be an issue, with a fascinating dichotomy unfolding,' Cheeseman commented. 'Some investors will now be looking to lock in gains made through the latter stages of 2009, while those who have sat on cash will psychologically struggle to commit money to markets; they’ve already missed a big upward rating and don’t want to invest ahead of any correction.'

With sellers potentially outnumbering buyers, prices could slip on thin trading volumes, although this could tempt more investors to dip a toe back into the markets.

Cheeseman said the recovery from the extraordinary events of 2008 was following a surprisingly normal pattern, suggesting the authorities have managed to steer the world away from the financial brink.

Coordinated efforts, like historically low interest rates, have provided a stable platform on which to build the recovery, although the recovery itself has been stronger in some economies than others, with the UK notably lagging other developed markets both in the pace and the magnitude of its rehabilitation.

However, Cheeseman said, 'A key risk is that economies recover too quickly and prompt policymakers to swiftly remove stimulus, which would give markets a real fright.'

On balance F&C’s multi-manager team sees this outcome as unlikely, and believes that asset prices still have some way to run.

Underpinning this expectation is the fact that many asset classes are now attractively valued, despite strong performance.

Credit markets, for instance, saw unprecedented gains in 2009, but spreads over government bond yields are still high from a historical perspective.

'With default rates likely to go down in the first quarter of the year, we believe there is scope for selective investors to generate further performance in areas like high yield,' said Cheeseman.

While sector rotation was a key driver of performance in 2009, Cheeseman said he expected returns in 2010 to be driven by stockpicking, and as a result is maintaining a broad representation of sectors across the market in the Lifestyle portfolios. The team also favours solid income generators, which will benefit the portfolios whether or not capital values continue to rally.