For investors, 2009 was easy. Now comes 2010

For investors, 2009 was easy. Now comes 2010


It looks like 2010 could be a lot more difficult, requiring selection and market timing to bring in the best results.

In early March , investors decided that  the financial system was not going to collapse into a new Great Depression and  as a result, riskier assets such as stocks and high-yielding bonds had sold off too much.

The gains of 2009 — as much as 30 per cent for world stocks year-to-date, 72 per cent since early March — came in the main from across-the-board buying. The more sold-off the asset had been, the higher it rose as investors almost indiscriminately stampeded out of what had by then become virtually zero-yielding cash funds in favour of any yield they could find.

It was essentially triggered by authorities making clear they would not let another major bank go under, a la Lehman Brothers, and by central banks pumping liquidity into the system.

Entering the new year, however, a lot of this has changed. Large price rises have eaten up what were seen as historic opportunities and central banks are preparing to haul back the liquidity. Some tight 2009 correlations are already breaking down, leaving investors to work a bit harder for their buck.

“2010 is going to be a year of discrimination with a very long bias towards quality,” said Bob Parker, Vice Chairman of Credit Suisse’s asset management arm. The need for more selective thinking also comes from the state of the global economy, which although improving, is both uneven and fragile. Investors have become more cautious about the investment backdrop as a result, a caution intensified by debt problems in Dubai, Greece, Spain and elsewhere. “Cyclical tailwinds and structural headwinds,” is how William De Vijlder, global Chief Investment Officer of Fortis Investments, described the current investment climate.

Quality please

What this means for equities is that investors are likely to be much more selective in what they buy, even if they do still believe that stocks will rally. Reuters polls showed that most investors are expecting equities to continue rising next year, although at nothing like the same rate they have been.

A quality pick, Credit Suisse’s Parker said, would be a company with low leverage, a high dividend and the expectation of keeping it, free cash flow, and a strong market share also with the ability to keep it.

Wealth manager Banque de Luxembourg has a similar slant, seeing defensives such as utilities attracting attention. “It makes a lot of sense to go out of things that are very cyclical and to go into things that are more defensive and pay interesting dividends,” said Guy Wagner, the bank’s Chief Investment Officer.

And as investors get picky about stocks, the same is likely to go for regions and other asset classes. While emerging markets remain a favourite for many investors in 2010, focus is mainly on fiscally sound countries in Asia, such as China, rather than on, say, eastern Europe.

“There will be more differentiation rather than just buying an asset class or region,” said Wayne Bowers, Chief Executive Officer for Northern Trust Global Investments’ international division.

Northern Trust unveiled a euro zone government inflation-linked bond fund but constructed its benchmark to exclude Greece and Italy, two of the area’s weaker elements. In effect, rather than just go underweight on those bonds, that said the fund simply wanted nothing to do with them.

What if?

The big risk to this “be picky” scenario is that the assumptions about 2010’s economic performance turn out to be false. If — and it is a big if — global growth were to take off sharply, riskier assets would most likely continue the climb that they have seen this year.

True, such growth would bring with it earlier interest rates hikes and a quicker end to liquidity-pumping exercises by central banks. But the reasons would be positive, and the resulting sell off in government bonds would drive money into a broad swathe of equities and the like. It is not expected to happen. But then again, who predicted the booming risk market of 2009 this time last year?

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