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Big bullish view for '10

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by Peter Switzer

As someone who spearheaded the “we might avoid a technical recession” and that “stock markets usually bounce 26 per cent on average after a crash” points of view months before the March rebound of share prices, I just love it when I find those who share my 2010 optimism.

Of course, there are a hell of a lot more optimists nowadays and while I think some surprise challenges are out there in 2010, history tells me that we will muddle through with economies improving and stock markets heading up. However, they will be a lot slower than what we saw this year.

Last week, I looked at the positive views of Fidelity’s Paul Taylor, who is the portfolio manager of Fidelity Australian Equities Fund.

And now, one of his well-placed colleagues has offered to share his crystal ball with me.

Surprise in store for sceptics

Trevor Greetham, a Fidelity asset allocation director and portfolio manager, thinks 2010 could surprise the sceptics as much as this year’s share market rally.

“While the recovery seems to be happening in slow motion, that does not mean it won’t be huge - and the markets have started to sense this much more quickly than most observers,” he says. “The difference between the multi-year bull market, that I believe began in March, and previous short-lived bear market rallies was that the rebound in stocks was confirmed by business confidence indicators.”

Last year, he argued the authorities finally got on top of the financial crisis, loosened policy to an unprecedented extent and, by doing so, restored trust in the system. Stimulus packages were designed to err on the side of doing too much rather than too little.

Greetham can actually see a boom ahead!

And it won’t just be a China and commodities story.

“Developed economies are likely to deliver surprisingly strong growth coming off such a depressed base,” he suggests. “Industrial restocking from these sleeping giants should boost commodity prices very significantly. I also expect increased investor buying interest, fuelled by fears of inflation and cheap dollar funding.”

Greetham believes equity-friendly conditions are back for the first time since 2007, with the emerging markets and Asia best placed to capitalise.

“Global growth indicators are strong, policy remains extremely accommodating and inflation is unlikely to become a serious problem in view of the massive spare capacity in the world economy,” he says. “It might not seem this way in the early part of 2010 as dramatically easier year-on-year comparisons in the oil price produce a short-term inflation scare. There's a risk this coincides with renewed growth fears, especially if the momentum of recovery cools somewhat and US unemployment does not come down as quickly as I think it might.”

Trade surge

Greetham is, relatively speaking, very positive and sees a big, global trade surge ahead.

“Interest rates could pick up sooner than many think if global growth surprises as positively as I expect,” he says. “The strength of new orders against a depleted level of inventories in the US and elsewhere points to a repeat of the explosion of world trade we saw in 1975.”

The interest rates stories in the USA and Europe will be different.

“I expect interest rates to diverge next year with the European Central Bank expressing concern about the headline rate of inflation while the Federal Reserve focuses on core rates excluding energy,” Greetham predicts. “Historical differences mean European institutions are usually more anxious about rising prices while America lives under the shadow of deflation.”

Negatives and positives

So what does he want to steer clear of next year?

“My least favourite asset class for 2010 is fixed income,” he reveals. “Corporate bond spreads remain attractive, though clearly less so than during the once-in-a-generation buying opportunity at the beginning of the year.”

He is worried about government bonds but he does not have Barnaby Joyce concerns.

“I don't expect governments to default on their debt, in fact the fiscal position is likely to surprise positively as economic recovery causes tax revenues to flood back in,” he argues. “It is just that yields are already very low and they are likely to rise as central banks move progressively towards removing their ultra-loose policy stance.”

He is more positive than many on global housing.

“I would expect the recovery in the UK and US housing markets to continue as long as an adverse inflation shock doesn't force interest rates to rise rapidly,” he says. “Confidence is improving and, together with job creation, this will be a key support for the recovery next year.”

Important decisions

Greetham says your allocation of investment funds between assets will be critically important in the years ahead.

“The uncalibrated and massive nature of the authorities’ intervention in 2008/9 is not a recipe for economic stability,” he points out. “Policy-makers panicked after Lehman was allowed to fail and I expect a continuing boom/bust cycle for some time as they try to dampen down some extremely pronounced cycles. This backdrop argues for flexible tactical asset allocation. It also calls for a multi-asset approach to investing.”

Given Greetham’s optimism, 2010 could prove to be another good year for the fearless who believed in great companies in one of the luckiest economies in the world. On the above analysis, if it’s right, it does not look like our luck is about to run out yet.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice

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Published on: Monday, December 14, 2009