I haven't written any finance topics of late, maybe because I haven't found inspiration. Now with a moment of it, I thought I start typing. The market in 2009 was brilliant, indices in the world doubled and wealth grew for many. 2010 had also a good run but indices lagged and the 'market' did not really perform. In Australia, resources companies have been the clear winner and financials were no match over the last 12 months. The ASX 200 is currently not much different from October 2009.
In my predictions last year, I was very bullish on stocks predicting 5500 for the All Ords and 11000-12000 for the Dow. I was quite a big way off for the All Ords but I was close on the Dow. The Aussie index has been a a laggard compared to the rest of the Asia Pacific indices. It was easy to be bullish after the huge rally in 2009 but as 2010 showed a slow down in market performance, my view is cautious for 2011.
QE2 by the Fed has been a key driver for the markets in the past months but this 'artificial' flood of money is going to wear out soon and markets will take a big turn, in my view. Billions of dollars are flooded in the market to support prices everyday, when it stops there can't be a good outcome. A third QE is not an option according to many experts. The Japan earthquake did stop markets for a few days, but after that Dow has only been in one direction after the few days of panic. It was a big buying opportunity and many stocks have rebounded since.
Since the GFC in 2008, money has been flooded in the market as though they cost nothing. Trillions of dollars have been poured in the market to avoid a deeper recession. Some say it had to be done, but the truth is it would have better off letting it collapse. To 'artificially' keep the market afloat is no different from avoiding the truth. The US economy is loaded with too much debt and the solution of the Fed to stimulate the economy is spending itself out of it. Where's the money coming from again? Debt. I call it a vicious cycle and until someone puts a halt to it, Americans have to fear for their future. The dollar is going to weaken further and inflation will be next for the economy.
Signs of caution in 2011
1) Higher oil prices
We know higher oil prices is not good for the economy because inflation will affect growth. Remember I said last time, oil prices only benefit people who own it, the rest of the people like us pays. The spiraling oil prices would indicate the first sign of a slowdown, in the worse case, a recession. Higher oil prices are also due to the unrest in the middle east, but the reason does not matter, the price does.
2) The ending of QE2
QE2 will end in a few months and there's no more money to keep driving the Dow. If prices are to revert to their fair values, we could see a major correction.
3) More defaults from Europe
Although it sounds like the debt problem has been solved for the big European countries, I am not convinced at all. The amount of debt they have to raise is staggering and the probability of another Greece story may not be far away. Debt ratings have a been slashed for a reason, a higher probability of default.
4) Lower growth from China
China grew at record rates even during the last recession for most of the world. The tightening of policies and increase in reserve requirements will definitely slow the economy down, but in my view, is a really good move in the long run. Short term pain for the world, but keeps in the bubble of housing from growing. There is a bubble in housing based on the record rise in prices but it is still within control at the moment.
Opportunities in 2011
The mood I have is cautious but there's still money to be made in the market. Stick to stocks with very good fundamentals and growth rates and of course invest in sectors that provide huge growth opportunities in an inflationary environment. I haven't mention there has been outstanding performers in the market over the past year and they haven't been contrary to history. Fundamentals are drivers of stock prices and they will continue to be . Market indices are there to show the performance as a whole but outstanding winners do not need any guidance from market indices. If they are good, they will perform.
Jim Rogers have been bullish on commodities since the 1980s and he has a few points to take from. This is not a new point but definitely invest in businesses that leverages on the demand from China. Japan is rebuilding after the disaster and there's no doubt they would need lots of materials as well.
And lastly, keep doing your homework and keep a closer look this year.
Invest for the future
~deyao~
