Published: December 11, 2009

For global investors, 2010 is shaping up to be a year with two very distinct economic outlooks.

In the first "half," which is actually likely to end in early September, investors can expect a continued escalation in commodity prices, generally bullish stock markets and an ongoing focus on powerful monetary and fiscal "stimulus" initiatives. In the second "half," reality will reassert itself, and investors will find the going tough in many markets.

The real question is: "Which markets will win, and which ones will lose?"

The Top Challenges Facing Investors
When you take the time to look closely at the global economy, the disparity between the new year's first eight months and final four months -- call it the "Tale of Two Economies" -- that I'm predicting actually makes good sense.

Huge monetary and fiscal stimulus programs throughout the world tempered the decline in global gross domestic product (GDP) that we otherwise would have seen from the 2008 financial crisis. And that likely made 2009 easier to navigate.

The beneficial effects from those two paths of rescue will continue during the first eight or so months of the new year. At some point, however, the bill for those initiatives must and will come due.

On the monetary side, bubbles in commodities will fuel consumer price inflation, so interest rates will have to be raised. On the fiscal side, the temporary boosts to demand will either run out or will be prolonged by further stimulus. In that latter scenario, the bond markets will at some point focus on soaring deficits.

I see three possible scenarios playing out in markets around the world.

First, countries that have done big monetary and fiscal stimuli -- think the United States and especially Great Britain -- face big doses of inflation and a possible bond-market collapse.

Then there are countries that rolled out big monetary stimulus initiatives, but held off on a fiscal effort. One example is China, where the fiscal-stimulus effort was big. That country had a major budget surplus when it announced its plan. Ultimately, however, China will face a big inflation problem.

Finally we have the countries that deployed fiscal -- but not monetary -- stimuli, such as France and Japan. Those countries won't have an inflation problem. But they will have a bond-market problem. And that could lead to a renewed economic downturn as those countries cut their budgets to cope with the issues at hand.

Very few countries are in good shape on both the monetary and fiscal fronts.

A Tour of the World's Top Markets
Let's start our economic-forecast world tour with the region that's most likely to have the best 2010: East Asia.

East Asia suffered a sharp recession in the first half of 2009, as world-export markets plunged. But the region has experienced an equally sharp recovery since that time. In 2010, export volumes should continue to recover. One caveat: They may see some weakness late in the year as higher interest rates take their toll on the global economy.

If you want to pick the best markets, you should look for those with solid balance-of-payment and funding positions, and very little distortion from fiscal "stimulus."

Japan has a budget deficit problem, and a huge debt problem. Its interest rates are too low, too. However, it's one of the world's great export economies, its banks are now in decent shape and its real estate is decently priced. It probably will do no worse in the second "half" of 2010 than the first, because it should benefit from a bursting of the commodities bubble.

Japan is one market that's well worth some of your money, particularly in domestic-oriented shares.

China's fiscal stimulus was large, but easily affordable, because the country was running a budget surplus. However, its monetary policy has been more of a problem. M2 grew +29.4% in the 12-month period that ended in October. Since economic growth ran at "only" 8% or so, there's a bad inflation problem coming. Thus, China's the opposite of Japan. It will do pretty well during the first "half" of 2010. But it will suffer a credit crunch in the second portion of the year as the authorities try to do something about their new inflation problem.

Korea and Taiwan both look to be in pretty good shape: Neither had too much fiscal or monetary stimulus, and both have good foreign-reserve positions. The upshot: They should benefit from lower commodity prices. These two countries -- half of the four "Asian Tigers" -- have each enjoyed a hell of a run this year. Even so, they're well worth some of your money for the new year.

Australia and Indonesia also are well run and did not have too much stimulus. But both may suffer if commodity prices decline. Australia, in particular, is one of the world's major mining centers.

Traveling to the west, we come to India, which continues to enjoy excellent growth. But it has a serious fiscal problem, with a consolidated budget deficit of around 12% of GDP. On the other hand, India's monetary policy is well balanced. And its foreign reserves are quite strong these days.

On balance, India should enjoy a pretty good first "half" of 2010. But it may experience some tough times in the latter portion of the new year. India's stock market is highly rated, but may have further to go in the short term.

Turning to Europe, we can see that Germany looks to be in excellent shape. It has a cautious monetary policy -- courtesy of the European Central Bank (ECB) -- and a cautious fiscal policy. Its export position is excellent. Since 1990, Germany has traditionally been a slow-growth economy. This time, however, it could well surprise investors to the upside. And it shouldn't suffer too much from tighter money in the second "half."

France, on the other hand, has a big budget deficit. I would be more cautious here, although it's worth noting that any crisis should be moderate due to France's fundamental strength.

Eastern Europe had a very rough 2009, but will have a better 2010. The best opportunities will be in countries like Poland, which do not link their currencies to the euro. Euro linkers/members will find themselves continuing to struggle with a currency that for them is overvalued.

Southern Europe should be avoided. Greece and Spain had huge real estate bubbles, and Greece now has a serious budget problem. Italy is in better shape, but its labor costs are uncompetitive.

Britain is a disaster area, and won't get better in 2010. In the new year's first "half," the rebound in the City of London will prop up the British pound and the real estate markets. In the second half, however, those props will be removed and the economy will lurch back into trouble. Britain had even more fiscal stimulus than the United States. It had too much monetary stimulus, as well.

Jumping across the Atlantic Ocean to Latin America, we see that Brazil has had a pretty good 2009. For instance, the country's stock market has more than doubled. But Brazil faces trouble in 2010. In the new year's first "half," rising commodity prices will prop up the country's economy. But in the last part of the year, political risks will once again assert themselves as commodity prices fall.

The government has this year shown a tendency to expand its control over the economy. This is bad news, and will show itself once the euphoria has passed.

The final stop on our whirlwind global economy tour is North America. There we find that Canada -- like Brazil -- will do better in the first "half" than the second part of the new year. But Canada's deterioration should be relatively modest. That country's monetary and fiscal policies have been sensible, so only a moderate slowing of growth is likely.

Finally, the United States will do okay in the first part of 2010, but faces monetary and fiscal crises in the second part of the year, with the predicted bond-market crisis and growing stock-market uncertainty. The U.S. stock market today looks to have gotten ahead of itself, so careful stock selection will be more important than ever. Call it a stock-picker's market.

It's possible that a crisis in one of the big emerging markets -- probably China or Brazil -- will be the catalyst that triggers the shift between the new year's two "halves." In the first part of 2010, we'll see generally strong markets and soaring commodity prices. In the final four months of the year, however, we'll see weaker economies and weaker markets.

However, it's much more likely that the change will occur right here in the United States.

One possibility is that rising inflation will cause U.S. Federal Reserve Chairman Ben S. Bernanke to -- very reluctantly -- tighten monetary policy. The other likelihood is that the difficulty of financing the huge federal deficit will cause big problems in the bond market. Quite probably, both will happen simultaneously.

I'm guessing that we'll see the transition occur in the late-summer time frame, especially since September and October are traditionally difficult months, for seasonal liquidity reasons.

The shift will very likely happen quite suddenly. It's unlikely that any of us will miss it.

-- Martin Hutchinson
Contributing Editor
Money Morning