Risks and opportunities for 2010

February 8, 2010, 10:43 am By James Ramsay jamesramsay

A quick look back at 2009 - hindsight - as always is very profitable. The question for investors is... what now?

As we are all coming back to work for 2010 we often access our investments and look what the year ahead can provide for us.

But first, a quick look back at 2009 - hindsight - as always is very profitable. All we had to do was load up on risk assets in just about any country except Japan and we would have received exceptional returns.

Last year also showed us again that a buy and hold portfolio is not necessarily the way to manage your investments. After seeing investors buy Babcock and Brown at $5.00 in the IPO and then ride it to a high of $34.78 and then watch it go into administration, it is clear some form of management is required. With another 25+ companies seeing the same outcome investors need to be aware things change and when they do you need to act.

2009 was the year where we saw a decade of growth wiped from share market investments in 12 months. What then followed was one of the fastest share market rallies some have ever seen with the market index adding +50%.

The question for investors is... what now?

Where can I see opportunities and gains in 2010?

A big opportunity for 2010 is growth-exceeding expectations. With companies being extremely efficient at reducing wage bills over the last 12 months I would expect to see unemployment to slow and move in a positive direction. Corporate cost cutting was swift and brutal with non-core assets quickly moved on to reduce overheads.

This has left us with some well run and efficient businesses that are ready for growth. We may be surprised by how well some of these businesses perform over the next 12 months.

A stronger US dollar will benefit some companies while others will suffer as a result. Rotating your portfolio towards companies that benefit from a stronger USD may prove to a beneficial strategy if the US dollar keeps strengthening.

Higher interest rates for most would be seen as a negative but for investors who hold cash or use Hybrids that pay a margin above the bank bill swap rate, you may be receiving a pay rise on increased rates this year.

What are some of the risks for 2010 that could derail the market?

The Euro Zone debt situation is not going away and may escalate - the PIGS (Portugal, Ireland, Greece and Spain) as they are now known, still need to deal with their debt loads. We saw how the Dubai World debt crisis created a sharp sell off once it was announced and markets got spooked.

A rise in energy prices would prove detrimental to global growth - oil back to $140 barrel? We hope not.

Inflation:

After a year of talk of deflation is it possible that inflation may be the silent killer lurking ready to explode? Analysts are still looking at deflationary scenarios but may miss the whole point. We have record low interest rates and economic recovery is under way. That leads to higher interest rates and if governments are slow to act we may see inflation spike above their preferred bands.

China - Bubble or just getting started?

After a period of high volatility we are seeing a period of low(er) volatility which is fine but remember volatility allows us the opportunity to take advantage of lower prices and potentially make investments that gain faster than the underlying market.

Government debt across the developed world is running at record high GDP to debt ratios. With higher interest rates the cost for governments to service the debt will increase which may force them to increase taxes to pay for it.

Aging population and baby boomers:

It has been 70 years since the end of World War 2 and the majority of baby boomers born in 1945 to 1955 are moving into retirement. This may put strain on government's budgets and there will be a significant social security issue.

James Ramsay is an advisor at Bell Potter Securities who works with you to build a portfolio using a range of investments that are suitable to you. You can contact him on 08 9326 7664 or jramsay@bellpotter.com.au.

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