The markets will offer an average return of 10 percent over the next couple of years, but volatility looks set to continue at relatively high levels in the future.That is the view of Paul Larson, chief equities strategist and editor at Morningstar StockInvestor, who was in Bermuda this week ahead of the launch of HSBC Bank Bermuda Ltd's five-year annual income opportunity Cash Deposit (CD) - Morningstar wide moat.Mr Larson believes that there are a number of good investment opportunities available in the market at the moment, including financials and health care stocks.“I would say that over the next couple of years if the median stock remains undervalued, I would expect an average return in the 10 percent range for the markets,” he said.“But I think you have to expect volatility to continue at relatively high levels, so one year it might be 20 percent and the next five percent.“You still have the Greek situation and the contagion effect and if Greece goes down does it take down European banks with it and then where do the dominos fall from there and is the problem going to spread to larger sovereign countries like Italy, Spain, Portugal and Ireland?”As part of the world's largest independent equities research firm, Mr Larson has been working in partnership with HSBC to provide the bank's latest offering which is available to investors between July 4 and August 5 with a minimum investment of $5,000 and the option to increase it by quantities of $1,000 and matures on August 12, 2016.The CD invests in 12 publicly-traded securities in companies such as Exxon Mobil, Intel, Lowe's, Microsoft, Time Warner and Wal-Mart, offering potential interest of six to nine percent per year and the guaranteed return of the principal investment with a floor of minus 30 percent.Mr Larson said that the economic moat concept selected companies with sustainable competitive advantages by looking at a range of financial metrics and qualitative factors and breaking down each business into non-moat, narrow moat and wide moat, the latter which accounts 10 percent of the almost 1,800 stocks Morningstar covered.Reflecting on the past year, he said that the market had enjoyed a good run between August last year and May this year with several stocks looking overrated, but the Standard & Poor's 500 six-week losing streak had snapped that and they had subsequently become undervalued.With the median stock about two percent undervalued, Mr Larson said there were a variety of underrated stocks like financials due to the debt crisis in Europe and health care as a result of fears over regulatory reform in the US.On the other hand, he said there were numerous overvalued stocks, the biggest of which was real estate, based on either capitalisation rates or yields, with Real Estate Investment Trusts having a good run diametrically opposed to the residential property market and currently at their possibly highest ever valuation, driven by investor hunger for yield.Other overpriced areas, he said, included Master Limited Partnerships, which also offered higher yields and had undergone a strong run over the past couple of months.One of the biggest impacts on the markets has been felt from the Japanese earthquake and tsunami which devastated the nation in March and Mr Larson reckons that the effect will be significant.“It had a huge impact, particularly here with the Bermuda insurance industry having quite a bad year,” he said. “This is going to be one of the worst catastrophe years on par with 2005 and Hurricane Katrina.“Also, we have seen it in the manufacturing sector. I think a large chunk of this transitionary soft patch is because of the Japanese situation with the auto industry suffering a supply chain disruption because of the economic slowdown.“It has really been a story of two economies up to this point - services has been very weak but the manufacturing economy has been exceptionally strong and the Japanese situation took a good chunk of the wind out of the sails of the manufacturing side and now we are starting to see that things are levelling off.”Mr Larson said that the energy sector had been heavily hit in the near-term, with Asia, and specifically Japan sucking up a large amount of refined products. The nuclear industry, which had enjoyed a renaissance of sorts for 30 years post-Three Mile Island in Pennsylvania, US. Hopes that it might be the answer to the world's growing energy needs, given it also produced no carbon emissions, got blown out of the water with the Fukushima Daiichi nuclear plant accident.“It will be bad for companies planning to build new nuclear facilities, but the positive is for the companies who already have plants now that their new competitors who were on the horizon are no longer there and the demand for power has not changed from before,” he said.“In the long-term there are the alternatives to nuclear power such as natural gas and also coal with coal plants getting decommissioned at a slower rate now and plenty of coal available, certainly in the US.”He said the best place to invest your money was in high quality stocks with companies that have pricing power such as Coca-Cola (based on the assumption that the average amount of work of 10 minutes has always equated to the cost of a can of Coke) to hedge against the risk of inflation.On the flipside, Mr Larson considers gold to be a less attractive proposition as the first place investors run to in the event of inflation to protect their assets.He said that there had been a lot of interest in Morningstar's new CD product, especially in light of those who got hit hard during the financial crisis of 2008/09 and were wary of getting hurt again, with the investment opportunity offering good potential returns on the upside with a narrow band of hand-picked stocks and protection through diversification on the downside.Trevor Spinney, sales and business development manager at HSBC Bank Bermuda , said: “This is the first principal protected CD HSBC has offered in collaboration with MorningStar.“It has been very successful in the US and hopefully we can leverage that here. In the future we would like to take advantage of Morningstar research going forward for other solutions.”Mr Larson is editor of Morningstar's StockInvestor newsletter, managing the publication's two real-money, market-beating model portfolios - the Tortoise and the Hare.He was also the lead writer and editor of Morningstar's three educational books on stock investing - How to Get Started in Stocks, How to Select Winning Stocks, and How to Refine Your Stock Strategy, while he created the curriculum for the stocks portion of the Morningstar Investor Training service in 2010.Previously, Mr Larson was an energy stock analyst and led Morningstar's dozen analysts who cover natural resource companies. Prior to joining the company in 2002, he spent five years as a writer/analyst with The Motley Fool, before which he attained a Bachelor's Degree in Bioengineering from the University of Illinois at Chicago and spent two years at the university's medical school before switching career, a change which came later than he would have liked, by his own admission after discovering a passion for investment.For more information on the HSBC/Morningstar product contact the investor centre on 299-5900 or your HSBC Premier relationship manager.