Now that the global economy appears to be stabilizing, investors should consider what a potential recovery may mean for their portfolio. Many economists and portfolio managers are expecting a classic V-shaped recovery, which would generally mean a solid rebound for most industries. But Stephen Wood, chief market strategist for Russell Investments, is convinced the recovery will be more slow and gradual than in previous recessions. If that's the case, strategic discipline and stock picking will be needed to ensure positive returns in 2010.
While we've recently seen signs that the U.S. housing market has improved and GDP growth has been strong in recent months, fears about Greece and other sovereign debtors in crisis have made the first two months of 2010 a rollercoaster for investors. With high unemployment numbers sending conflicting signals and consumer confidence at historic lows, the U.S. economy has had a difficult time gaining momentum.
"It's not going to be one of those V-shaped recoveries where a rising tide lifts all boats," says Wood. Although he predicts gross domestic production in the U.S. will grow at about 3.55% in 2010, he believes gross domestic product growth in Europe will be close to zero this year, slowing down the overall global recovery.
Looking For Revenue Drivers
With a sluggish global recovery on the horizon, Wood says stock picking and bond picking will be more important in 2010 than it has been in the last couple of years. Since most companies relied on budget cuts and productivity enhancements to meet profit projections in 2009, Wood says, "2010 becomes more of a revenue game where you have to pick what is the small number of companies that can actually drive revenue in what is going to continue to be a challenging environment."
Woods says that companies that can keep a handle on their costs as well as stabilize or increase sales will be big winners in 2010. He believes top-line sales growth will drive profits this year because most companies can no longer cut their way to profits. "Last year companies were able to cut costs by a larger amount than sales fell -- that added to profitability," he said.
Wood said companies within the technology, financial services, energy and low-end consumer discretionary sectors are best positioned to excel in this slow growth environment. Technology companies have an advantage because they will benefit from selling productivity-enhancing software and systems to companies across all industries.
More Hands-On With Portfolios
Financial services firms should continue to show growth because they have strengthened their balance sheets over the last year, "But you really need to know what you're doing," when you analyze their records, he said.
Companies that cater to lower-end consumer discretionary spending will benefit, as consumers trade down in price to save money. And oil services and exploration companies in the energy sector provide opportunities because with their strong balance sheets and low debt, they can take market share from competitors and drive revenue.
Investors will not only have to select the right companies and the right sectors, but they will also have to be more hands-on with their portfolios. "This might be a year of adding incremental gains to the portfolio," said Wood. This means that investors should consider taking incremental gains quickly, then re-balancing back to pre-determined allocation levels before waiting for the next opportunity to buy.
High Single-Digit Increase In Stocks
For example, when the market sold off and dropped below 10,000 briefly in early February, that was an opportunity for investors to take gains, rebalance and buy into stocks that they could give a five-year time horizon to grow.
Wood believes U.S. equity markets will show a high single-digit increase in 2010, but to benefit, investors must show long-term strategic discipline.
"Given how choppy this year has become and is likely to stay, the expected benefit from disciple goes up because there is so much noise and so many risk components in the market," he said.
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