2010 - A smoother ride ahead?

After 2009, many investors will be hoping for a nice steady, small ‘up' year for the markets. Will we get it? I think we might get a relatively benign year for the index but within that there will likely be some vicious sector moves. This will mean that there will be large disparities between active fund managers (we have to justify the fees somehow!).

The first phase of a bull market (and this current market) is by far the most powerful, and the best one to participate in, but unfortunately it is the one that most people miss out on. This bull market started in October 2008 when the commodity stocks bottomed but began in earnest in March 2009 when the financials started moving. I may have to disappoint some, but this phase is most definitely over. We have seen many stocks move up by 100-1000% and any further moves will be 10-100%, which is good but A LOT less exciting.

The next phase is when stock pickers come to the fore. Within a sector, some stocks will significantly outperform others, and some sectors will significantly outperform others. This phase is one that we have been in since September 2009. So far we have seen financials behave quite poorly and emerging market plays do very well (anything exposed to China really). The rotation may go back and forth for some sectors, creating extra headaches for fund managers (an example being financials which have been strong for the last few weeks). This phase of the market should give a 15-20% market move, which would get the FTSE to around 6000.

The third and final phase is when the market starts to lose momentum and stocks start to roll over, having seen their ultimate highs for the cycle. This is the time for long only managers to be getting into defensive stocks and long/short managers to be moving net short. We may enter this phase sometime this year, as I believe we are in a short cyclical bull market rather than a long structural bull market.

What will push us into the final phase? I believe it will be the convergence of a variety of factors; tightening of interest rates in the growth economies (China etc.), a withdrawal or slowing of stimulus in the West and recognition that there is little fundamental value left in many share prices. This does feel like a picture that may emerge this year although the market will wax and wane on this (the perennial fight between bulls and bears).

All in all, I think it should be a good year for an absolute return manager, not a 30% year and probably not a 20% year but still a decent year if one can generally call things right. As ever, I am relishing the challenge of extracting performance from the market and I hope that those reading this can similarly make a decent return in 2010.