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The 2010 crystal ball

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by Peter Switzer

This time last year, I was cautiously optimistic that we would see an economic and stock market rebound over 2009. I didn’t expect the share price comeback to be as big as it turned out to be, so what is my crystal ball telling me for the year ahead?

Market guess

What I am about to point out to you could be a little scary, so I am going to give you the good news first. I have told media outlets, when I was put on the spot, that my guess is that the ASX/S&P 200 will make it to around 5,600 over this year.

Now note, I did use the word 'guess' because that is all it is.

There is no science, economics or computer modelling that I rely on that gives me that number.

I have noticed since my prediction has gone public that many commentators, many with their complicated market models, have come out with similar guesses (or, to be less of a smart Aleck, forecasts).

If it happens and your portfolio of shares closely reflects the broader market index — the S&P/ASX 200 — then this will mean a double-digit return from investing in shares. And that ignores the dividend payments.

Now, all of this hinges on a steady recovery in the US over 2010 and it needs to see improvements in major economic powerhouse regions such as Europe, the UK and Japan. I am taking for granted that China, India, Brazil and most of South-East Asia will keep on growing nicely or even very strongly.

Watch out

What can go wrong? 'Lots' is the simple answer, however, my big ones to watch are the US and China.

There are short-sellers and hedge fund managers who make money talking down a target that they’re trying to make money out of. Sometimes they are right, but sometimes they are trying to create moneymaking opportunities.

“(China) is a surging real estate sector buoyed by a flood of speculative capital,” says billionaire hedge fund manager Jim Chanos.

“It looks like Dubai times 1,000 — or worse!”

He doubts their GDP numbers and then he says what all smarties in the prediction caper come up with — a prophecy without a date!

"I’m looking for plays on the China investment boom, which we think will burst at some point,” he said in the middle of December. “Demand in China is over-inflated, that is clear."

If he turns out to be right, this call is a cheap investment in getting a journalist some time in the future to hail him as a genius. If he ends up being wrong, it is unlikely the same journalist will cover his mistake.

My concerns over China could be related to being over-dependent on this economy with the rest of the world struggling but I remain in the ‘China onwards and upwards camp’ over 2010.

The US story

Over to the US, and I want to see steadily improving retail and housing sectors. This could be a tall order as it has been a brutal recession with big job losses, resulting in scared consumers who have started saving like never before. However, they have come out of hibernation for the Christmas shopping season, if my experience in New York over New Year's can be trusted.

Overall, credit in the USA has dropped for 10 months in a row and that’s a record number of consecutive declines. In 1943 and 1991, there were seven falls on the trot.

Jobs recovery

Many experts say the jobs recovery will be different this time.

“In housing, we 're going through an abnormal cycle," says David Crowe, a US economist talking on CNBC. “We started losing jobs almost two years before the rest of the economy, in late ‘05, early ’06. We usually go [into a recession] first, but come out first. That’s not going to happen this time. We’re expecting weak job growth in general in 2010.”

A lot of housing-related jobs have been lost. The mortgage industry’s jobs doubled between the end of the last recession and early 2006 to 504,500, according to the US Bureau of Labor Statistics. But by October of 2009, about half had been lost!

Wait for the second half

There’s a lot of interconnection between this sector and retail as new homes and new buyers of old homes want renovations, new TVs, furniture and other consumer durables. This all creates jobs.

This is why I want the negative, doomsday merchants over 2010 to be gradually seen to be wrong. Better than expected retail and housing news will be crucial for the optimists.

That said, we might have to wait until the second-half of this year to feel more comfortable about my more positive view.

Numerous market experts can see corrections ahead, and they are always possible, but I will use them to buy stocks at better prices. I don’t worry about quarterly and even annual returns on my self-managed super fund because I am investing on a much longer time scale.

Look at it another way

For those worried about the Chanos on China view and the predicament of the US with respect to housing, retail and jobs, here is an alternative view.

There are economists in the US who say deep recessions bring strong recoveries. This happened in the 1980s.

“The primary structural problems I hear most frequently, they think there's a new norm of housing, those jobs are gone permanently, I kind of doubt that myself,” says Chris Rupkey of Bank of Tokyo-Mitsubishi on CNBC.

”Structural changes play out over a decade. I'm a little sceptical about a jobless recovery.”

Ups and downs

I know 2010 will have its ups and downs.

I know there will be some worrying economic statistics and other market-challenging developments, but I suspect we will muddle through the year making the predictions of the doomsday merchants wrong again!

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: Wednesday, January 13, 2010