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2010: an easy year for investors?

When reading the forecasts of the big investment banks one can only conclude that 2010 will be an easy year for investors. Consensus has rarely been so strong. To summarise: 2010 will be a good year for equities, especially the first half. The second half may be more challenging, as investors will start to anticipate interest rate hikes by Western central banks or – if the strength of the recovery unexpectedly disappoints – start to fear a double dip. Emerging markets will again outperform developed markets and government bonds will yield low single digit returns at best.

Looking at the consensus profit forecasts (+25%) and the still reasonable equity valuations, this view makes a lot of sense, especially for the near future. Looking out a bit further, only one thing is certain: when 2009 was all about timing (the recovery trade), 2010 will be all about dualism. Will we get a sustained recovery or will a cautious consumer cause a double dip? Will central banks exit their “free money” policy soon or will they finance new bubbles? Will bank lending remain relatively tight or normalise quickly? Nobody can answer these questions with any degree of certainty.

However, the biggest dualism may be seen in the clash of cyclical forces with structural ones. The current cyclical upturn should definitely be viewed in the context of underlying structural trends: the increasing dominance of emerging markets, the aging population in developed markets and the accelerating digitalisation of our society. The first development is inflationary, but the second and the third are deflationary. After all, older consumers tend to buy less big ticket items (they already own a house and a car) and online shopping creates perfect price visibility, with the cheapest offer just one click away. It may not be a coincidence that the yields on longer dated government bonds remain stubbornly low, defying all the talk about economic recovery and imminent inflation.

So . . . 2010 may turn out to be not such an easy year after all. How should investors cope with these complex issues? Firstly, never bet on only one “classic” outcome. This time, past experience may not be a good guide to the future. For now, equities indeed appear to be the most promising asset class, but do not write off the prospects for bonds! The battle between inflationary and deflationary forces is probably more balanced than ever before and any fears of a double dip could easily bring 10-year yields in the strongest Eurozone countries below 3%.

Secondly, within equities, it may be time to buy the losers of the past decennium, the technology stocks. The digital “fantasy” of 2000 is increasingly becoming a digital reality and valuations are quite reasonable. Online shopping is growing explosively, many applications are going mobile and the world will need incredible amounts of flat screens and data-storage space. As a bonus, this sector is better prepared to deal with price pressures than any other, as it has never known anything but deflation. Investors who are more focussed on income generation may also consider the telecom operators, which on average have a dividend yield of almost 6%.

Lastly, after the explosive rally in smaller companies and lower quality bonds, investors should gradually refocus on stocks and bonds of large, well capitalised companies, which are now more attractively valued.
In 2010, boring may be better!