Investment outlook 2010

Think cautiously: hot money, asset bubble, inflation, policy exit, strong US$ ….

Global healing, not global boom

Global GDP had contracted by about 1% in 2009, the worst since 1982. Undoubtedly the world has started to heal in about June, and continues to bounce as China, Brazil, India and Southeast Asia are pulling relentlessly. While we believe the world will eventually heal all its deep-cut wounds caused by the financial turmoil of 2008, a full recovery is unlikely to be seen until the end of 2012. For 2010, we will have a global recovery, not a global boom. While the stock markets of Hong Kong and China are still in their party moods, we caution investors to think about the possible setbacks that will cause some really volatile swings for the markets.

Hot monies will depart

There were no sign of their departure so far, but if they do depart, the bull market will end without hesitation. There are plentiful profits with the hot monies already, so the lure to depart is irresistible. Besides, their flows are hypersensitive to the policy changes and shifting relative attractiveness of the different markets. As such, by nature they won’t stay.

Asset bubbles will burst

Many young doctor and lawyer lovers can’t afford to buy a shelter to get married. We will not see public land sales resuming. As such, property prices will continue to rise. The asset bubble will burst when all young couples are marching on the streets on 1st July 2010, or when the hot monies suddenly leave and cause the market to collapse.

“Policy exit” here and there

Given the globe will reach the flexing point of its recovery path during 2010, the central banks must withdraw the excessive liquidity from the system. Their “policy exit” may take different forms, and start at different times. Yet the end result will be the same: interest rates will go up, so as the mortgages and borrowing costs. Only by doing so, the G7 (and to lesser extent, China) can curb inflation expectation before inflation runs. As the “policy exit” is equal to high interest rate, equity markets will head south when the politicians are heated up with the debates of when and how to exit, a signal telling the stock market to contract, in our view.

US$ strengthening

The US$ had declined by 10-20% against most Asian currencies in 2009, causing gold price to reach over US$1200. The US dollar index of the Reuters was 89 in Feb and is now 77. In 2010, the US$ will likely strength instead of continue to fall, the US economy will finally start to recover and the number of new jobs will rise. A stronger US$ will lift the appreciation pressure from the RMB, and will also induce a majority of the hot monies to flow back to the US, causing severe swings in the HSI.

Hot themes for the mid-caps

We believe coking coal, steel, cement, heath care, sportswear, green energy (car batteries and wind) are the hot themes from which we can identify many super outperformers in 2010. China’s infrastructure will boom in 2010, due mainly to the Rmb4 trillion rescue package of Q4 2008. Steel, coking coal and cement should be investors’ main focus in the next 6 to 9 months. As living standard improves, the sportswear and health care stocks will perform fantastically. We also believe the green energy companies will remain hot in 2010, including those involving in wind and solar energy, and those supplying the next generation batteries for cars.