Cape Town - Investor returns in 2010 will depend on the fund managers' ability to identify value in small and
mid-cap companies, says wealth management group Plexus.
Looking back, the year 2009 ended with strong
indications that central banks' emergency measures have been successful.
Most financial institutions survived; there are strong indications that the
global economy is emerging from the recession and equity markets, especially
emerging markets, have delivered exceptional returns for investors who were
willing to take some risks.
But according to Prieur du Plessis, the Plexus group chairperson,
economists and market analysts are divided on the sustainability of the
global economic recovery and the prospects for global economic growth in
2010. As long as uncertainty prevails, inflation remains subdued and central
banks keep interest rates low while maintaining most of the emergency
measures, liquidity will remain high.
Explaining his investment team's thinking, Du Plessis said: "We believe
the current level of liquidity is too high and the greatest risk to the
financial system lies in these excessively high levels of liquidity that
could ignite and fuel inflation to very high levels.
"At the same time we also believe the high levels of liquidity and
inflation may offer the best investment opportunities in 2010.
He and his team consider the situation could change late in 2010 if the
global economy returns to higher growth rates, or when worldwide inflation
increases.
"This would leave central banks with no other choice but to
withdraw the existing emergency measures and increase interest rates to
reduce liquidity," he said on Tuesday.
The Plexus team reckons that the current weakness in the dollar and
the pound are the result of the low interest rates and high levels of
liquidity in the US and UK financial systems. This dollar and pound weakness
should continue as long as interest rates remain low and liquidity high.
"Investors should therefore limit their offshore exposure to the
dollar and the pound in favour of currencies such as the euro, yen and
emerging market currencies," Du Plessis said.
"Investors can expect the US
dollar and the pound to strengthen later in 2010 if the US and the UK start to
increase interest rates. The offshore exposure should then be realigned to a
more balanced exposure."
On commodity prices, the Plexus experts reckon prices should strengthen
as the dollar continues to weaken.
"Industrial commodities should also
benefit from stronger economic growth as the demand for commodities
increases," they say.
"Gold, however, would benefit from higher inflation
and from the efforts of mainly emerging countries' central banks to
diversify their foreign exchange reserves away from the overwhelming
exposure to the US dollar."
They observe that equities in the mining and basic materials sector
should benefit from the current higher commodity prices, but industrial
companies would need a more definite recovery in industrial production and
consumer spending.
"Financial institutions should benefit from the improved quality of
current loans and further growth in credit extension," the team says. "The
year 2010 should thus be a stock picker's market where good returns will
depend on the fund managers' ability to identify value in mostly small and
mid-cap companies."
The after-tax return on cash and money-market instruments is currently
very unattractive, Du Plessis said. "A portfolio of perpetuate preference
shares offers a much more attractive proposition. The yields of most
preference shares are after all linked to short rates and the yield of
preference shares will increase when short rates increase.
"The very low bond yields are unattractive from an income perspective,
but stronger economic growth and higher inflation could push long-term rates
higher to more attractive levels. However, any increase in long-term rates
means an immediate drop in the capital value of investments in bonds.
"This
is also true when long-term yields increase at the end of the quantitative
easing programmes. Inflation-linked bonds would be a more attractive
alternative as the principal investment will grow in line with inflation."
- I-Net Bridge