SUMMARY. After a remarkable couple of years we enter a year of transition, the hope being growing evidence of a self-sustaining recovery (i.e. not reliant on Government support). The range of possible outcomes is wide (as it was a year ago), so we must all stay vigilant and not let the sharp recovery in investments through 2009 make us complacent.
NB The latest edition of the TopFunds Guide is due in late January. Email back to confirm you would like a hard copy in the post.
An amazing year, in fact a remarkable two years. The bust for markets in 2008 followed by a boom for markets in 2009. But markets don’t operate in a vacuum, and the health of underlying economies also has to be taken into account when considering what lies ahead for markets. Where the global economy was on the edge of an ugly precipice in the Autumn of 2008 (see our recent note “within minutes of Great Depression II”) action by Governments and central banks allowed a moderate recovery and some stability. That stability is a requirement for a longer term recovery but no guarantee of one.
For example, on the face of it the US economy is moving ahead, but deeper analysis shows that nearly all the growth in recent quarters is accounted for by Government initiatives (such as cash for clunkers) rather than, say, increased consumer spending or capital investment by business. What is required in 2010 is evidence of increased confidence from consumers and businesses feeding through into higher spending and investing. This will only unfold gradually, and not easily against a background of no improvement in employment, a tough housing market, growing concerns about commercial property, the need to raise taxes, and the day coming nearer when interest rates will have to rise.
But that is just the US. In Asia and emerging markets, both investments and economies are booming, having shown their mettle in 2008 and 2009. More to the point there is a growing view that not only are growth prospects for years to come superior in these areas, but they are also less risky than the typical focus for UK investors (UK/EU/US). We are sympathetic to the this view, in fact we would not be surprised if emerging markets go much higher in 2010 (though there might be a price to pay in 2011).
Valuations for the UK stock market are not too bad. But there are broader economic problems similar to those in the US, plus a General Election which could cause extreme turbulence in the stock market and currency, particularly if there is a hung Parliament.
To summarise the 2010 outlook… in simple terms, on the one hand it is easy to visualise (indebted) Western economies stalling, but it is also easy to visualise their stock markets rising on the coat-tails of spiking Asian and emerging markets (particularly the FTSE 100 index with more of an international bias than most). These are quite extreme outcomes but both very plausible, so we must all stay on our toes. Investor focus should be on areas where there is still obvious value (some corporate bonds and high yielding shares) and others where there are superior long term growth prospects (Asia and emerging markets), while being wary of growing risks in the short term as values are chased higher.
