While strong corporate profitability and sustainable cash flows will enable equity and credit markets to make good returns during 2011, investors should prepare for further turbulence, according to Standard Life Investments.

In the latest edition of Global Outlook, the global fund manager warns investors that financial markets are still subject to political uncertainty and investors face major risks from the effects of decisions which governments do or do not take. The clearest example is how governments collectively deal with sovereign stress in Europe.

However, these issues are by no means solely for the larger countries, Standard Life said. For example, inflation pressures are rising in some emerging economies, which may need to take more decisive action, while capital controls are appearing in certain countries worried about overly large capital inflows.

Andrew Milligan, head of global strategy at Standard Life Investments, commented: “We believe that a balanced approach is needed for portfolio construction. Undoubtedly, the global economy has positive momentum, and there is a strong policy bias to try and stimulate growth, but we expect it will periodically struggle to achieve above trend growth for some years.

“Certainly, corporate earnings can grow apace, albeit slower than last year, but geopolitical risks and margin pressures should not be under-estimated. These will impact on sentiment, causing periodic market falls. On balance, we continue to favour sustainable yield – exposure to sustainable cash flows – as an investment theme for asset allocation.”

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