Low exposure the key as prosperous 2011 looms

Next year should be better. Not a particularly positive opening gambit, but unsurprising in view of current volatility.

Liquidity drives markets. The CrossBorder Capital Global Liquidity Index peaked in the first half of 2009 at 90.5% and has dropped sharply since the end of October. It was flat in April at slightly below-average levels of 43.5%. Tighter liquidity conditions spell higher market volatility and, on cue, the VIX index shot higher during early May 2010. The underlying problem is not yet the start of quantitative tightening by policymakers, but market liquidity has still tightened. Collectively, the world’s central banks have kept policy neutral, but weak private-sector liquidity has dented...