Investment ideas for 2010

Previous posts on the potential of a Dollar rebound came to a fruition, with a gain of over 2% against the euro last week, hitting a 3 month high, after Greece’s debt downgrade and further evidence that the U.S. economy may be coming out of recession faster than the Euro Zone. But a stronger dollar managed to hold back the Dow Jones Industrial Average, which closed down 143, to 10,329 and the S&P 500 fell 4, or 0.4%, to 1102. The U.S. stock market, has now risen 22% in 2009 and over 60% since the March low.

The U.K. FTSE 100 finished the week at 5,197 down from 5,320 as the fall in commodity prices hit the heavily Oil weighted index due to Shell and B.P..

Strong results from Research in Motion (RIMM) and Oracle (ORCL) both propelled the stocks higher on Friday, and for 2010 Technology is looking increasing interesting. Those companies which have been hit by a contraction in revenues during the recession could see better times in 2010. For example, Media companies such as Google (GOOG) and ITV (ITV) should benefit as advertisers return to the market. Chip manufacturers, like Intel (INTC) have already shown signs that inventories are waning and consumption is slowly increasing both in personal computing and Enterprise.

2010 could start strongly as companies spend the cash they had hoarded, replenishing depleted inventories and begin to take staff on after focusing on cost reduction this year. Analyst expect the S&P 500 companies to earn $76-80 in 2010, , versus $61.33 in 2009. U.S. companies cut capital spending by 16% in 2008 and another 32% in 2009 and cash now makes up 9.7% of their assets, well above the historical norm near 6.2%.. This cash is already being put to use, for example, the recently announced takeover of XTO Energy (XTO) by Exxon, and the purchase of Starent and Tandberg by Cisco (CSCO) in October. The inevitable takeover buzz should help to sustain momentum in the market in Q1 and Q2 next year.

But as the global economy starts to expand, interest rates will begin to rise (as seen in Austalia). This will raise debt costs both for consumers and corporate. A higher U.S. interest rate would normally drive the U.S. dollar higher which will make life harder for exporters. However, the Federal Reserve seems set on an agenda to drive growth not fears of inflation so interest rate increases are likely to be modest. In the U.K., the reliance of the economy on the financial sector, and lower growth than the rest of Europe should mean that U.K. rates stay near 0.5% for much of 2010 which may pressurise the pound in addition to the deteriorating deficit situation. Investing in U.S. stocks therefore seems to be a better prospect than the U.K. during next year.

Recommendations for 2010:

Invest in U.S. tech, media, consumer

Reduce exposure to commodities

Reduce exposure to Emerging markets

Reduce exposure to U.K.