What an extraordinary year 2009 has been. In January I mentioned to a neighbour I would like to fast-forward to 2010 because I thought it was going to be so awful. Instead we have seen asset prices rise just about everywhere. Not only have equities and bonds responded to huge global stimulus, but so have classic cars, antiques, and fine wines. Why has this happened when the economic background in the UK and elsewhere still looks so poor? Quite simply it is because interest rates are so low. With the best instant access accounts in the UK offering in the region of 3 per cent, investors are desperately looking elsewhere for better returns.
As far as the UK is concerned I do not expect interest rates to go up in 2010. Instead I see a tough post-election budget dampening consumer spending, which will keep a lid on inflation. Furthermore, government stimulus measures will have to be withdrawn at some stage, and it is questionable whether there will be sufficient demand in the global economy to keep things ticking along. Politicians are still living in denial and there will also be some tough choices to make, especially in the public sector whose spending is, frankly, unsustainable.
However, the economy and the stock market are two very different propositions and, while it would be absurd to expect a repeat of 2009's performance, equities could do reasonably well despite a difficult economic backdrop.
Rather than dwelling too much on the economy, a recurring theme of this column is identifying the best fund managers, which I believe is the most productive way of capitalising on the opportunities of 2010 – just as it has been in 2009. This year the top-performing funds have been a widespread bunch reflecting sectors that rebounded strongly from a torrid 2008: commodities, UK smaller companies and certain emerging market funds. In fact, some were highlighted in this column, including CF Oceanic Australian Natural Resources, Neptune Russia, Standard Life UK Unconstrained and JPM Natural Resources. However, I think 2010 will be a different kind of year with a far narrower band of equities leading the way. The successful formula for 2010 will be finding these companies; and a number of managers previously highlighted in this column will be well placed to do this.
If interest rates remain low there is every chance high yielding equities will be rerated. Against bonds and cash, companies yielding 5 per cent or more with stable balance sheets and predictable earnings look attractive. Neil Woodford, of Invesco Perpetual Income, has had a poor year by his standards, but he should bounce back in 2010 in this kind of environment. Certain growth stocks will also prosper despite the economic woes. The Old Mutual UK Dynamic Fund managed by Luke Kerr is worth following in this regard as it captures the best ideas of the Old Mutual smaller companies team, one of the finest in the City.
Finally, there are a number of managers who have historically made the big asset allocation calls successfully, and should be able to navigate the challenges of 2010 to the benefit of investors. William Littlewood, who manages the Artemis Strategic Assets Fund, Philip Gibbs at Jupiter (with his new Absolute Return Fund) and Crispin Odey (of the Insynergy Odey Fund) are all seasoned investors, who should prosper with their flexible or absolute return style strategies.
In conclusion, while I remain pessimistic about the economy and the state of government finances, I do think that global markets can make some headway so long as interest rates remain low and inflation is kept at bay. However, making tactical asset allocation decisions is more difficult than ever, and I would suggest this is something best left to the fund managers I have mentioned. With this in mind all that remains is for me is to wish all our Independent readers a prosperous and very happy 2010.
Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent