Commodities, and in particular agricultural ones, may prove one of the best for investors in 2012 – better than bonds or shares - helped by demand from emerging markets, UBS said.

Investors should not expect strong returns in any markets, with safer assets, such as US bonds, already looking expensive, and uncertainties surrounding factors such as the eurozone debt crisis, besides US elections, likely to curtail gains in riskier assets.

"Elevated cyclical and sovereign risk premiums will cap risk asset performance and keep markets volatile and unusually correlated," the bank's chief economist, Larry Hathaway, said.

"Tactical reallocation" of funds to sectors appearing oversold "will remain a necessity" if investors are to outperform.

'Best return prospects'

However, commodities at least looked set to improve on this year's performance, when they had – bar precious metals, the top performer of any asset class – shown a small decline, performing worse than bonds, but ahead of global equities.

"The commodity complex may offer better return prospects in 2012 versus 2011," Mr Hathaway said.

And farm commodities looked particularly promising thanks to their exposure to themes of growth in world population and emerging market wealth.

"Agricultural commodities, a secular play on the commodity super-cycle in food… are likely to offer the best return prospects next year and should represent better value than precious metals," which had already enjoyed such significant gains.

UBS rated farm commodities, with high-yield credit and hard-currency emerging market debt, as the asset classes in which it recommended an "overweight" rating.

The likes of property and shares were attributed a "neutral" recommendation, with UBS recommending "underweight" positions in most government bonds.

'Decisive' factor

The bank preference for farm commodities tied in with a thesis that a key difference for 2012 will be the higher profile of emerging economies on the world stage, with a slowdown in inflation allowing easier monetary policy.

"Inflation has peaked. Only a handful of emerging countries, among them India, are still tightening. Some, like Brazil, Turkey or Indonesia have trimmed policy rates," Mr Hathaway said.

While emerging market economic growth rate will slow in 2012, by 0.5 points to 5.5%, it will remain well above the 1.6% seen in advanced economies, on UBS estimates.

"Might emerging [market monetary] policy easing and the prospect for a better emerging business cycle later next year prove decisive for the 2012 investment outlook?

"We believe the answer is 'yes'," with emerging market improvement coupled with a firm US performance potentially capable of neutralising the setback to financial markets of a likely return by the eurozone to recession.