Report by Paul Crocker
With the New Year approaching, a few investment predictions are perhaps in order.
Unfortunately, timing frequently makes a fool out of many who tread this path. The credit crunch provided no better example of a situation which, with the benefit of hindsight, was out of control and had to end.
However the lending frenzy lasted for far longer than expected because change ultimately requires a catalyst (in this instance, the collapse of the US housing market) and markets frequently move well beyond the levels suggested by fundamental analysis.
We should never doubt or lack trust in our observations, regardless of what others may be doing or saying, to justify the status quo. This can be difficult when so much emotion is tied up in markets and investors swing from greed to fear and back again.
As an investment manager, there is little value to be added by being reactive and indecisive for fear of making an incorrect call. Clients pay professional managers' fees, and in return expect something more than just index tracking which an exchange traded fund could achieve at a fraction of the price.
High investment management costs combined with mediocre returns imposed by asset collectors disguised as investment managers is, however, a topic for another occasion.
My first prediction for 2010 is that those with a high carbon lifestyle are in for a shock. Regardless of our personal views on climate change, governments around the world are determined to reduce the level of carbon emissions.
Therefore, in a society in which we are dependent upon consuming vast amounts of fossil fuels, alarm bells should be ringing alerting us to the fact that if we want to continue our current levels of fossil fuel consumption, it is going to cost a lot more in the near future.
This is so much so that we may not be able to afford to maintain our current lifestyles even if we embrace new clean technologies at considerable expense. Big inefficient houses, gas guzzling cars, distant second homes, long-haul holidays and even parts of our diet are in reality going to become very expensive.
We will get the first taste of what is to come in 2010 regardless of whether the COP15 summit in Copenhagen is a success. There is no going back: change will happen and soon.
My second prediction is more market specific and concerns gold bullion, which continues to dominate the headlines as the price surges.
Although dismissed by some economists as nothing more than a temporary blip, there is growing evidence to suggest that the rising gold price is a sign of increasing unease with regard to the US Dollar’s role as the world’s reserve currency.
I expect this trend to continue over the coming year unless, against the odds, the US economy achieves a sharp economic rebound. A lacklustre US will only propel the debate on the Dollar which I believe is now in long term structural decline. With International Monetary Fund gold sales being snapped up by many emerging foreign reserve rich countries, it appears that the appetite for the Dollar is waning fast and alternatives are being sought.
It is, however, in everyone’s interest that an orderly transition occurs given that anything else would create havoc.
Therefore, unless the US can reassert itself as a major economic force quickly, stop printing money and convince the world it can address its deficit, I expect ongoing Dollar weakness and gold strength.
My penultimate prediction covers a favoured topic of resource scarcity caused by globalisation and population growth. According to the Energy Information Association, despite last year’s oil spike to $147 per barrel, global oil production remained broadly static hovering between 73.9 and 74.7 million barrels of oil per day.
I find it difficult to comprehend that in today’s world, a commodity can surge by 50% without being swamped by supply as producers take advantage of a price surge. With economic growth rebounding in the developing world (Chinese new car demand is likely to exceed the US in 2010), there is increasing evidence that supply is close to peaking.
The coming year may provide us with hard evidence that this is the case, unless of course the global economy slumps once again. This, however, would just delay the inevitable.
Finally, I predict that, despite some fairly strong undercurrents in the capital markets over 2010, there will be ample opportunity to make money.
Although the virtuous trading cycle of the past two decades may have not have the support of the American and British consumer, there is no shortage of opportunities if one focuses on themes such as climate change, Dollar status and resources scarcity (ranging from food to the role of nuclear energy and oil).
Business which fails to adapt will struggle and disappear as we move into a new era; however there will be no shortage of entrepreneurs seeking to take advantage of the changing environment which will impact our lifestyles and our investment portfolios.
For those wishing to address these issues head on, there is great opportunity and, at IOMA Investment Management we are looking forward to the coming year with confidence.
