Ten suggestions for 2010 investment portfolio
Having in mind that there won’t be a year like the last one, many investors are wary about how stock and bond markets this year will follow their remarkable 2009 surge.
Markets can’t go up 65% in the first few months of 2010 like they did in the last nine months, but this doesn’t mean that 2010 will disappoint. In the current economic environment fundamentals have to come through. Companies have to deliver the earnings. When the market become earnings-driven, there will be more sustainable gains.
The biggest difference could be that stocks in 2010 are founded on tried and true measures such as financial strength and earnings power, rather than speculation. That would favor big multinational companies in cyclical and growth industries that stand to benefit from economic improvement, in particular the ones from the energy, industrial and telecom sectors .
Technical and historical factors will additionally contribute. After the last nine months of the stock market’s rally from the markets lows, the average pace of advance will most probably slow. However, the local markets tend to continue rising.
In 2009, investors generally embraced higher-risk stocks and high-yield bonds. The defensive stocks were considered some sort of lower-quality holdings.
In 2010 the bulls have a good chance to retain the upper hand. However, because of normal setbacks on the way up, investors will have to be more selective. Here are 10 suggestions to help you position your portfolio through 2010:
1. Consider stocks with a global footprint
In a slow-growth environment, bigger is better. Big companies have the clout to counter adversity and capitalize on it. “Bigger” also refers to companies of any size with a broad global presence. Global companies have diverse revenues and operations, which both insulates core businesses and fosters innovation and expansion.
Some UAE companies in the last few years have been impressive examples of how to operate effectively overseas. Moreover, these companies are exporting their business to fast-growing emerging markets. Big part of the revenues for some companies registered on DFM and ADX now come from outside of UAE. The demonstrated ability of these companies to replicate their business overseas and earn attractive margins and returns abroad is a very important development. With the global economy continuing to integrate, companies that have the best managements, strategies and balance sheets are going to take advantage of this. Emaar, Arabtec, Aramex, Etisalat and Dana Gas are good examples. The ability of these companies to move into the foreign markets isn’t reflected in the stock price.
2. Buy blue-chip
Large-cap stocks lagged their small-cap and midcap counterparts in 2009, but many market observers say that big firms’ time has come. Large, blue-chip companies are the last remaining pocket of undervaluation. A basket of blue-chip companies with a 5% to 10% dividend is a good choice. Many local public listed companies provide global exposure, high-quality earnings and attractive dividends – attributes that investors could increasingly value as the year unfolds.
It is very much likely that 2010 will be another positive year for stocks. That would mean a significant gains for the indexes – a standout return for the market.
3. Use stock dividends as a bond substitute
Shares of companies with strong balance sheets and stable earnings growth are not only better-equipped to handle the economy’s waves, but their dividend income is a welcome alternative to the uncertainty swirling around bonds.
Current dividend yields relative to bond yields provide an attractive opportunity for investors. A prolonged period of low bond yields may encourage investors to begin seeking alternative ways to increase income, and high-quality, dividend-paying stocks may be a solution. Stocks fitting this bill include most of the financial sector.
4. Build on the industrial sector
The industrial sector will prove another economic recovery bellwether. Overweights from this sector are firmly recommended, as the global economy will be stronger in 2010 than in 2009, and that this will be reflected in this cyclical sector’s profitability. From a valuation standpoint, the sector offers better value than other economically sensitive areas. In general, industrial stocks that tend to benefit in the early stages of an economic recovery will perform better. These include building products, industrial machinery and defense manufacturing along with their financers. Domestically, research points to companies involved with infrastructure projects, such as cement and ceramic manufacturers – BILDCO and RAKCC.
5. Plug into the energy sector
The energy bulls are banking on a continuing global recovery and strong emerging-market demand. Energy is our preferred global recovery play and could be the year’s best-performing sector, depending on oil prices.
Analysts are bullish, particularly for companies in the integrated oil and gas industry. the global economy making a smooth transition from one that has relied on government stimulus to one that is earnings-driven. S&P’s favorite energy stocks include Dana Gas and TAQA.
6. Stick with telecom stocks
Telecoms were good performers in 2009 and the sector’s earnings prospects are strong. The sector is poised to benefit from a healthier global economy, a notable telephone devices replacement cycle and considerable international exposure. Telecommunication companies got robust balance sheets, phenomenal free cash flow, and while the stocks have done well and valuations aren’t as cheap, there is room for them to outperform. As the largest telecommunication company Etisalat (listed on ADX) is of higher cost, du is more accessible for the majority for investors.
7. Count on market acquisition
Companies in solid financial shape, flush with cash and little debt, are poised to take advantage of weaker rivals. They can grow earnings and market share organically or buy their way in; with many acquisition targets still priced attractively, corporate managements likely will choose the latter path. As such companies are taking their business to where the opportunities are, currently they are on shopping sprees to expand their overseas presence or buying competitors through sensible acquisitions, e.g. Aabar. They are positioning themselves for the next 10 or 20 years.
8. Pocket the local currency
The greenback will eventually make it’s comeback and as the local dirham is pegged to it, the strength of the currency will be reestablished. Long-term currency movements are a reflection of relative global economic growth. Since the U.S. was the first economy into trouble, it will be the first to recover and dollar strength will result. The dollar remains the world’s reserve currency.
9. Avoid long-term government bonds
Long-term government funds were the worst-performing bond category in 2009 and experts don’t expect any improvement in the year ahead. Returns on long-term bonds will be modestly negative, while investments in shorter-term bonds, with a goal of reinvesting at higher yields later is more feasable.
10. Embrace emerging-markets consumers
The engine of growth has shifted to the emerging markets. Of course, emerging markets have already enjoyed a tremendous run. Majority of diversified emerging markets funds were up more tha 50% the last year and averaged 15% annualized gains over five years.
While caution is in order from a valuation perspective, emerging markets are still eye-catching, especially if you focus on these regions’ growing middle class. Rising living standards are prevalent across the developing world. Investors tap into emerging-market consumers through shares of large-cap emerging-market financial and consumer-related stocks.
Another avenue to the emerging-market consumer are energy providers. Sensible economic, political and regulatory reforms have resulted in years of low inflation, economic stability and income growth that have brought millions of new consumers to the marketplace.
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