My 2011 investment outlook. With stock picks or not?

Merry Christmas to everyone who is reading this post! I am starting my year end note a little earlier this year because I have no idea how long it is going to take to finish this note. Especially when I intend to pick some ideas and give some view on the market direction, this means it will take a lot more thinking a whole lot of my time.

Looking back at this year, I have already posted 59 posts which is more than 1 per week, however I really doubt I will be able to post this many in the coming year because my work is just going to get more challenging and my time with my beloved stocks will dwindle to almost nothingness. Ok I admit it is a little dramatic, but the fact of the matter is, it is really very difficult to keep things going for the blog going forward. Lets hope for the best and really I do wish to see more of you silent readers to become followers for the blog because it would be a justification for me to continue writing this.

So Tuan Sing really moved 3 days after my post, now people are really going to think I am a contra trade stock picker. I really had no idea that Business Times was going to publish an article 2 days after I did. If I did, I would have mortgaged my house and bought into the stock! My goodness, I did not make a single dime on the stock because I was still trying to determine how I should rebalance my personal portfolio to include Tuan Sing but now it is just flown away from me....sigh.....Maybe in the future, I will only post after accumulating enough of the stock....but that would be unethical. The dilemmas in life....balancing between ethics and money.

This year has not been as fruitful as I hoped it would be. To be honest, it has been a turbulent year for my personal portfolio and I have been struggling to beat my benchmark of 10% real return on my money. Figured that if it is possible to deliver such returns, I should be retired by 45 years old. Do not misunderstand that I have tons of money to start with, but all I am targeting is to have as simple a life as possible and that does not take much money in the first place. So that is why I have set such low expectations.

Moving into this year's final post. Where should we start? How about risks? It is always important to look at the downside before looking at the upside. So lets start off with the risks that I see in the market.

Inflation

Yes yes, I know the central bankers like Trichet and Bernanke are all talking about how they feel inflation will remain tepid in Europe and US. They are probably right and it will stay low for another 12 to 18 months but there is a problem here...we DO NOT LIVE IN EUROPE AND THE US. We are going to face inflation of above 4% going into the next year and you know what? That is just the FAKE figures that our governments are going to report to us. Imagine what will the true rate of inflation be? Inflation will be key going into the next year as we have had a great year for emerging markets and wage pressures and material costs are going to be main drivers for the inflation problem in emerging markets. The competitive devaluation of currencies makes it a conducive environment for inflation to breed. It is not wise for investors to rest on their laurels next year on their reliance on fixed income.

I personally know that there are some very established investment strategists that are still recommending investors to buy into emerging market bonds but I believe they are underestimating the inflationary pressures these countries face in 2011 and that will really hurt their bond prices. Lets be honest here, which of you do not think inflation is something which we do not pay enough attention to. That is all due to the "money illusion" which governments create in our perceptions, but that is a theory which will be left for another post cos I do not intend to spend my whole Christmas weekend writing this post.

The theme will be based around the fight against inflation and balancing it against worries over the robustness of the economic recovery. If central banks continue to look at economic recovery as fragile, inflation will catch up on them without them realising it. Emerging markets have to realise that they will have to move their model away from export model to a consumption one. If is going to be difficult because if consumption picks up, inflation will too, if currencies are managed artificially lower to help exports, inflation moves up too. Thus it is really a "catch 22" situation for them. The biggest problem for most people are their inability to look beyond the short term and into the long term. Some times short term pain may really lead to long term gain. However governments are giving too short tenors for each election cycle and they tend to use stop gap measures to "stop start" their economy according according to election cycles and that distorts the economic growth path for most countries. China will be the only exception for this because their governments stay in place till they are too old. Hahaha. Just kidding.

So when evaluating investments, investors will have to take note of inflationary risks and make sure that the underlying investments they choose to take will have potential to return more than the inflation rate. I would target a return in excess of 8 percent to be safe.

Europe will continue to be a worry zone because we are very quickly running out of peripheral countries to distract us from the possibility of Spain or Italy to default on their debt. Remember, even if these countries do not default, the press will make it out to be. So I would just say, expect volatility in these markets. Will a sovereign default materialize? Maybe. Will it hurt us? In the short term yes, but in the longer term no. So expect Europe to continue to contribute to the volatility but take it as buying opportunities.

It is my belief that it is practically impossible for all parts of the world to do well altogether. If Europe suffers, we will benefit in one way or another. Do you know why food and energy prices have been low over the past 30 years? That is because there are large parts of the world suffering from starvation and lack of materials and power. Now that these parts are emerging from the darkness of poverty, some places have to lower their standard of living just to make up for this increase in demand. ZERO SUM GAME, understand? Harsh? I know, but face it, its the truth and it hurts because this is not UTOPIA.

The US will probably continue to do well because of the loose monetary policies in place and throw in QE2 and the extension of tax breaks (QE3), it all makes for a very conducive investment environment. Who will lead the S&P 500 forward to higher levels? Financials of course! They have not performed well this year and only picked up over the past 3 weeks because strategists out there are realising the fact that financials are the lagging sector throw the Pharmaceutical sector, we have the dogs of S&P 500 in 2010. What could screw things up for the US? I would say higher mortgage rates which we have been seeing for the past 5 weeks where treasuries have taken a beating leading to higher longer term yields and higher mortgage rates. The yield curve is steepening and that would mean that mortgages are going get higher. We could see a pop in mortgage take ups over the next few months as house owners may be afraid of higher rates in the future and rush to get their refinancing done, but after all that is done and dusted, what happens next? Could we see a double dip for housing? That is my fear for 2011. As I have said many times, Bernanke is probably the man made for this job. You want cheap money, he will give it to you. So he will think of some way to save the housing market. You can bank on that happening.

What do I like for 2011? I love real assets, be it properties and commodities. I am really bullish on them. Totally expecting the Singapore government to continue to introduce more property price cooling measures in 2011. In fact, it should come sooner than later so do expect to see it. But if you hold a long term view, I continue to like Singapore properties. I love commodities, especially soft commodities and energy. No gold? All my friends will know that I have been calling for gold since it was 600 bucks so I really do not want to keep calling for it. Is it a good hedge for inflation? I really think it is overrated. The best hedge for inflation will be where the inflation is coming from and they will be in housing, food and energy. For precious metals, I would promote platinum because it is the laggard behind silver and gold. This is totally unjustified because the demand and supply situation for platinum is still very bullish for the metal. Sell silver and move into platinum. I hope a close friend of mine whom I told to buy silver 5 years ago will listen to me again. You know who you are. One commodity I really like for next year will be Uranium. Very bullish on it because North Korea has placed an order to buy tons of it for their nuclear enrichment programme. Hahaha. Just kidding. I believe nuclear energy will see more take up over the next few years and uranium will be red hot.



Stocks Stock and more ...... (STOCKS)

It is no secret that there is nothing I love more than stocks as an investment. So I am going to end off with a few stock picks that I feel will do well for everyone's portfolio....

Nah...I guess I will leave it for my next post because I really am getting a little tired of typing. So will it be next week or will it be next year when I put the list out? Keep guessing.

Have a great Christmas! Stay blessed!

Best,

SVI