of the great paradoxes of 2009 was that economic meltdown went hand in hand with strong gains for many investors. After a disastrous few months when everybody was pricing in the end of civilisation, stock markets bounced back, house prices started to rise again and many traders made vast returns.
As I wrote yesterday, some of these increases in asset prices were misguided – especially house prices, which are once again over-valued. Others, however, were more justified: stock markets are not especially pricey either here or in the US; and many investors made a killing in gold, the fixed income markets and emerging markets. Some individual equities did extremely well: Barclays is a case in point. Its price fell far too low on misplaced fears – in some cases fuelled by the media – that it was finished. It turned out instead to be one of the great winners from the crunch, delivering huge returns.
But while 2009 was a bizarre year for investors, 2010 will be more straightforward. The name of the game will be to combine wealth preservation with an ability to jump on some of the many opportunities that will be available to make good returns. Property will be very tricky this year; the bond markets could easily be trashed if gilt yields surge as a result of the end of quantitative easing combined with a continued crippling budget deficit. Higher interest rates will depress equity valuations in standard models (by cutting the value today of future cash flows). Cash rates will remain low and be depressed by increasing consumer price inflation.
Even if the UK economy grows by 1-1.5 per cent in 2010, it is hard to see how these negative factors will be avoided. The only ray of light will be globalised firms: because the FTSE 100 is now so dependent on global sales – and no longer represents the UK economy – it could outperform again. The consensus 10 per cent rise estimated in a poll of analysts this week may not turn out to be true; but it is certainly in the realm of the feasible. Life will be tougher for the more UK-centric companies. Yesterday’s surprise decline in November retail sales won’t be the last such shock.
We were also very lucky in another way in 2009, despite the collapse in output. protectionism remains under control; the gains of globalisation have not been reversed. Some countries have imposed some capital controls but a real backlash – a relapse into autarky, huge tariffs, the dismembering of global financial institutions, the deglobalisation of capital and labour – did not happen.
What wasn’t avoided was a generalised loss of confidence in capitalism, however: after every recession, ordinary voters turn against business, financiers and the wealthy; they did so in the 1930s, in the early 1990s and in the early noughties after Enron and the dot.com bubble. But this time it is far worse: we are going back to punitive tax rates on all high earners, with more likely to come next year. The biggest single tax threat to investors – apart from more windfall levies on banks and high earners – is that capital gains tax might be hiked in 2010.
Looking further afield, I’m even more worried about geopolitical risk. The Iran question has been in the background for several years now; at some point it is likely to flare up. The consequences could be devastating – and not just for the price of oil.
Investors must beware: compared with 2009, it will be harder to make money this year – and even easier to lose some.