Guess whether China's policy interest rate >>

Guess whether China's policy interest rate, worry about the finances of the U.S. government or valuation of Spanish bonds, strategists say one thing in Edinburgh is clear in the coming year: the political economy of victory.

Fund managers in the Scottish capital, are investing in stocks, corporate bonds and commercial property by paying the highest dividend income, and revenue stamps as they navigate the markets waiting to be directed more by the action of the government on policy fiscal monetary and economic developments.

"Politicians need to step up their game tight, or sometime in January, February, March or April will not be a subject of great size that really worry the markets," said Andrew Milligan.

The People's Bank of China raised the reserve requirement on December 10 for banks for the third time in five weeks to quell inflation, while the U.S. estimates that its budget deficit will exceed 1.5 trillion U.S. dollars this year. The Spanish Treasury yields are near their highest in eight years because of concerns about debt the country would mean the strength to Greece and Ireland in the need for a bailout, further undermining the euro.

"One of the unifying themes about the risks is that many of them are political," said Bill Dinning, head of strategy at Aegon Asset Management. "We know that the European solution is political. Absolutely Policy issues in China."

Up, Down

The MSCI World Index of developed stock market is up 6.3 percent this month after falling 2.4 percent in November. This year, the index has fallen every month is increasing, giving an overall 7.8 percent since late 2009.

The performance of the Spanish 10-year bonds rose 1.52 percentage points to 5.52 percent in the past two months. The difference in yield, or spread, than the equivalent German bonds has quadrupled to 256 basis points since the beginning of the year. Production is less than half of the Greek debt equivalent.

"Earlier this year we will start to see some increases in volatility, mostly due to this problem in the euro zone do not think has been resolved yet," said Mike Turner, chief strategy officer at Aberdeen Asset Management.

In the U.S., the Office of the White House projected federal budget deficit this year will exceed 10.6 percent of gross domestic product, and remains as high as 3.9 percent of GDP in the first half of the next decade as the government tries to boost the economy.

Increased risk

The stimulus from the Federal Reserve will boost yields, according to Dining, Milligan and Turner, who together oversee the strategy to invest over 360 billion pounds ($ 560 million).

"Risk premiums will remain high in an environment where there is much uncertainty on both the structural health of the underlying economy and what policy responses are going to be some of those challenges," said Hall.

China raised interest rates in October for the first time since 2007, inflation rose at an annual rate of 4.4 percent. Since then, the central bank raised the reserve requirement for lenders three times in five weeks. The national inflation rate reached 5.1 percent last month, the most in more than two years, with food costs rising 11.7 percent.

"A central bank raises reserve for three and a rate increase only in the last two months, I'd say it's a central bank is panicking," said Milligan. "I did not see what he has seen."

Disrupt markets

Additional steps of Chinese policy makers to control inflation, especially food prices, may be a significant variation in stock prices worldwide, "said Turner.

"It has to be a risk because the market is not worried about that right now," he said. "That could upset markets in the global sense."

While dining was more optimistic about stocks, three strategists favored holding corporate bonds this year to benefit from the revenue growth expected to continue in 2011. Aegon bought stocks with higher dividends and bonds sold, sometimes in the same company, Lounge said. Turner and Milligan have been pushing more money into non-investment grade securities to get higher performance.

As this year ends, the first question is how European politicians are behind the euro, which has weakened by more than 9 percent against the dollar this year and is the worst performing currency higher.

"We're all hoping the next year to be quite good, despite the risks we are talking about," said Milligan. "That said, 2012, 2013 and 2014 we will all have the same problems."