Of all of the 52 weekly market commentaries I do each year, this one's always the most exciting for me. I've been doing these top 10 investment themes off and on for the past 18 years, and this marks my second top 10 commentary with The Hartford. Here's how these top 10 investment themes work: I don't change them with each and every economic release or earnings surprise-these top 10 themes are written in stone. At midyear, I'll write a midyear market commentary on them-a midterm "report card," complete with grades from "A" to "F." Then, after the year ends, I'll write a year-end report card commentary early in 2012 giving a final grade for all 10 investment themes for 2011.
Here are my top 10 investment themes for 2011. Just like David Letterman, the king of the top 10 lists, I am starting with #10 and working my way to #1.
I believe it's no longer a question of "if," it's a question of "when" rates will go higher. They can't go lower, because interest rates, as measured by the federal funds rate, are currently at zero. With inflation in the pipeline-because every central bank in the world has been printing money-it's also only a question of when, not if, inflation will show up. With inflation on the horizon, interest rates must rise in order to tame future inflation fears.
As 2011 unfolds, most businesses will be faced with a two-part, multiple-choice question as demand turns around and they remain understaffed since the market meltdown of 2008. In order to meet this growing demand, businesses must either 1) hire a few additional employees to meet this demand, or 2) improve on productivity by upgrading their technology. The answer is "door number two." Why? If businesses solve the demand problem by hiring more employees, they must provide them with healthcare coverage and other benefits, create a career path for them, and give them time off for vacation and health reasons-all the while listening to them whine and complain. With technology, all they need to do is buy a computer and plug it in-it takes care of the rest.
I believe that in 2011, the global economy will expand by nearly 5.5%. One of the biggest industry beneficiaries of this global economic boom will be the industrial sector. When someone says "industrial sector," think mining, farming, refining, construction, and manufacturing-all the things poised to benefit from a booming global economy.
Germany is the largest economy in Europe, and the fourth largest in the world. Germany is the second largest exporter in the world, with more than $1 trillion of exports annually. As the currency of Europe continues to weaken because of all of the debt problems associated with the PIIGS (Portugal, Italy, Ireland, Greece, and Spain), the price of all European exports continues to go lower as well because of the weaker currency. Think of it like everything in Europe is on sale-like K-Mart's "Blue Light Special." The biggest beneficiary of a booming, global economy and a weak currency will be the export king, Germany.
While being "green" and "clean" is admirable for our environment, it's not a very good way to make money. With the global economy growing well above-trend growth at 5.5%, there's only one way it's possible to make money: A lot of traditional energy must be consumed to fuel all of that above-trend growth around the globe. Possibly the biggest winner of this global boom will be the energy sector.
Continuing along that global economic boom, I expect the construction industry to have a record year. As the construction industry booms, so does the materials sector-it's the materials sector that supports the construction industry. (When I say the materials sector, I want you to think in terms of mining and refining of metals, chemical producers, and forestry products.)
It was Napoleon who once said: "When China awakes it will shake the whole world." Well, China's awake, and the whole world is shaking. Here's the most important fact regarding China: Their population is 1.3 billion. To give you some frame of reference, the United States population is the ".3" part of China's 1.3 billion. In addition to the sheer population boom going on in China, many businesses in the United States, Europe, Asia, and South America are looking to expand to one place: China. It's amazing to me that so many businesses think their future is in China. I'm willing to bet that the future will indeed be in China.
Regardless of what happened in the most recent congressional election in the fall of 2010, and regardless of what may, or may not happen in the upcoming presidential election in 2012, here's my prediction: The U.S. budget deficit won't be fixed over the next three years. When faced with the largest budget deficit since the "Great Depression," there's no easy fix. A lot of tough, political, unpopular choices need to be made, and it'll take time for this to happen. So, as our budget deficit remains high, the value of our currency (the U.S. dollar) has only one way to go: low, and lower.
I firmly believe that the United States economy is on the road to recovery in 2011. I further believe that the rest of the world will display greater signs of economic growth than the United States. I also believe that some time in the latter part of 2011, employment will recover in the United States. Meanwhile, outside of the United States, that employment recovery is already well underway. If economies and employment are stronger outside the United States, then there will be greater investment opportunities outside the United States-especially when you overlay the weak U.S. dollar, which makes any investment returns earned outside the United States worth even more.
Not only are commodities my top investment theme in 2011, but they'll also be a great investment opportunity in 2012, 2013, 2014, and beyond. In fact, over the next five years, I believe that commodities will potentially be the top-performing asset class. I believe this for two reasons. First, because our budget deficit is so large, and can't be fixed in the short run (over the next four or five years), our currency will remain weak, and get even weaker because of that fact. Why is that important to commodities? Because commodities are dollar-denominated, as the value of the dollar goes down, the price of commodities goes up. As a result, higher commodity prices may be with us for quite some time. Secondly, I've found a common theme running through emerging markets the world over. Every emerging market from China, to India, to Brazil, to Poland, to Chile has the same goal: to create a middle class. When all emerging markets of the world have the same goal of creating a middle class, there's only one way that can happen-by using an unprecedented amount of commodities. Over the next five years, commodity demand from emerging markets should be off the charts.
In closing, let's put my "10-4-11" into action with my suggested asset allocations for 2011. I know that this asset allocation isn't right for everyone. It doesn't take into account individual investor risk tolerances and personal investment objectives. It's simply meant to provide you with an additional frame of reference when you sit down with your financial advisor to personalize and customize your asset allocation plan for 2011.
With the understanding that you won't do ANYTHING until you sit down with your financial advisor, here are my asset allocation suggestions:
I'd suggest the following breakdown of alternative & non-traditional assets:
I hope you stick with me and follow along with the progress of these investment themes as the year unfolds. Here's how it will work when I issue my midterm report card: Any theme that receives an "A" or a "B" is considered correct, and any theme that receives a "C" "D" or "F" is considered incorrect. Over the past 18 years, I've averaged a little more than 66% correct. The best I've ever done is eight out of 10; the worst I have ever done is five out of 10. But, no matter how I fare in terms of grading, you can always count on me being here.
Happy New Year everyone, and remember 2011 is a great year to get your investment objectives in order. I'll close this commentary with one of my favorite quotes on investing from Ralph Seger, respected businessman and investor: "An investor without investment objectives is like a traveler without a destination." It's my hope that my top 10 themes will help you achieve your investment destination.
P.S. Please check back next week when I post my final report card for my top 10 investment themes for 2010 on January 17, 2011.
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