What to Invest in 2010?

For some investors during 2009, investing was easy; they simply poured money into riskier assets and watched their value rise. However, it seems that 2010 will be much tougher and will require careful selection of both assets and timing to achieve the best results.

At the beginning of March this year, investors concluded that the financial system would not drag the global economy into a new Great Depression, and that the sell-off of riskier assets such as stocks and high-yield bonds had gone too far. Gains this year in global stock markets, approximately 30 percent from the beginning of the year to date, and 72 percent from mid-March to date, are primarily the result of indiscriminate buying. The prices of those stocks that were most heavily sold in the previous period have risen the most after investors decided to reinvest their money in capital markets. This investment stampede was fueled by announcements from authorities that they would not allow the collapse of another major bank, like Lehman Brothers, and by the liquidity pumping from central banks around the world. However, as we enter the new year, many things are changing. The previous strong surge in stock prices has erased historical investment opportunities, and central banks are preparing to siphon off excess liquidity.

"Next year, there will be differences in the selection of stocks to invest in, with a strong preference among investors for quality," said Bob Parker, Vice President of Credit Suisse’s Asset Management division. The need for much more selective thinking also arises from the state of the global economy, which is on the path to recovery, but is still uneven and fragile. Investors have already become more cautious towards the end of this year, resulting in a reduction in investments, as they are disturbed by the intensification of debt problems in Dubai, Greece, Spain, and other countries. For stock markets, this means that next year investors are likely to be more selective in their purchasing decisions, even if they still believe that the rise in stock prices will continue.

A Reuters survey showed that most investors expect stock prices to continue rising next year, but not at the same rates as this year. Quality selection will represent stocks of companies that have low debt, high dividends, free cash flow, and a strong market share, with the important caveat that they are able to maintain it, says Parker. At the wealth management bank Banque de Luxembourg, they have similar assessments, also noting that defensive sectors such as water supply companies and other utilities will attract more investor attention. "It makes sense to exit very cyclical stocks and invest in those more defensive ones that pay an interesting dividend," says Guy Wagner, the bank’s chief investment officer. While emerging markets remain the most favored investment destinations for investors next year, their focus is more on countries with greater fiscal stability, such as Asian countries like China, rather than on Eastern European countries. (H)