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As the economy is set to take a turn for the worse in 2009, investors would do well to avoid the rollercoaster of the stock market and diversify their exposure across a range of asset classes or invest in a balanced fund, said Trevor Greetham, portfolio manager of Fidelity’s Multi Asset Strategic fund.

Greetham said the next year would see a number of countries tipping into recession, with global growth slowing sharply, while markets would remain extremely volatile.

Having spent most of 2008 worrying about inflation, the possibility of deflation is policy makers’ greatest fear, Mr Greetham added.

The collapse in commodity prices has been the catalyst in sliding inflation, he pointed out.

"This stage of the cycle favours bonds over equities and cash," he said.

"Government securities look like being an attractive asset next year, as central banks continue to slash rates.

"Income will be at a premium as deposit rates fall sharply. For more adventurous income-seeking investors, corporate bonds look attractive."

Yields are very high compared with those on risk-free government securities, although investors will have to brace themselves for a significant rise in corporate defaults from their current low levels, Greetham warned.

"Equity investors face a tug of war between deteriorating earnings prospects and increasingly attractive valuations. Dividend yields are beginning to offer support, and shares look cheap when compared with both earnings and asset values.

"The worst of the banking crisis is probably behind us, and consumer stocks have already moved to discount a severe recession."

He added that interest-rate-sensitive sectors such as consumer cyclicals and defensive areas such as staples and healthcare will be the most attractive areas for equity investors, while financials are likely to outperform industrials.

The residential property market will continue to fall, but at a slower rate as lower interest rates kick in, Greetham said.

He predicted commercial property would be affected by a shortage of credit as banks rebuild their balance sheets.

However, the market is already heavily discounting this sector, and property’s sensitivity to interest rates could make it one of the first to respond to a government fiscal stimulus.

Further, Greetham said one of the surprises in 2009 could be a recovery in US consumer spending.

"At some point, though possibly not next year, reflation will move on to full-blown recovery and a sustained bull market in equities.

"For me to become bullish, I will need to see signs that policy ease is taking effect, banks are lending again and bargain hunters are coming in to support property prices."