All that glitters / The word from Davos, on investments
Six ideas for the bemused investor of 2011.
Even though Davos was thronged by bankers, economists, and people from insurance and accounting - all of whom are (in a word ) investors - the topic of investments hardly arose.
In the cold air of the Alps, the burning topics have been geopolitics, global economics, the imbalances of the economic blocs, the unequal distribution of income, and social responsibility. All the same, here are some ideas for the bemused investor of 2011.
1The big banks mustn't fall. In the event of an existential threat, the state will step in. Simon Johnson, former chief economist at the International Monetary Fund, calculated that the six biggest banking groups in America control assets equal to about 65% of GDP, up from 56% before the crash and 15% in 1995. The banks are even declaring intentions of expanding further around the world. Evidently, nobody has the political clout to stop them.
The same applies to Europe. At Davos, all the European leaders piously declared allegiance to the euro and the euro zone. But all know that their main motivation is to keep the huge banks of Germany, France and Britain stable. These banks hold vast amounts of debt issued by Greece, Spain, Ireland, Portugal and so on; the banks' collapse would bring down whole countries.
Your conclusion as an investor: Buy shares and bonds of these banks, because governments will create the conditions for them to continue to prosper and gradually shed all that garbage on their balance sheets. It's true of the Israeli banks too. At the height of the crisis, the Bank of Israel declared it wouldn't let Israel's banks fall.
2The future belongs to technological innovation. At Davos, we saw clearly how countries are competing over who will train the most engineers, invest the most in education and initiate the most complex engineering projects (China will, of course ).
The consensus is that the leader in technological innovation will lead economic innovation as well.
Your conclusion as an investor: Anticipate huge stock offerings by the likes of Facebook, Groupon, Linked-In and other Internet and technology companies. Buy technology, it's hot.
3The next crisis will come from India and China. They're supposed to be the new empires, the locomotives pulling the world economy, but that doesn't mean they can't falter. Economists are seeing worrying signs.
Johnson postulates that India will be to blame because of its mounting debt and political system, which seems incapable of making hard decisions. A Bloomberg poll of international investors found that 45% expect a crisis in China in the next five years.
Another 40% think the crisis will come, but only after 2016. China is in the grip of a credit-fueled speculative bubble, they say. It can't stop until there's a crisis or the economy slows down.
It's impossible to predict when any of this might happen, of course. But wary investors should cut back holdings in Chinese or Indian shares or bonds.
4Commodity prices are rising. The people at Davos expect the Western economies to recover and predict strong economic growth in the East, Russia and South America. Translated: People will consume more and commodity prices will rise.
Already agricultural commodity prices have been soaring, setting off riots in North Africa. The predictions include shortages of water, oil, agricultural commodities and agrochemicals.
5The rich will grow richer. The gap between the rich and poor will widen further. You might deplore the trend and wonder about ways to reverse it, but as an investor you could pick companies that specialize in products and services for the wealthy. The wealthy feel like binging again; companies making yachts, planes and brand goods are likely to do well in 2011.
6The U.S. dollar won't be the world's reserve currency forever. Signs of things to come were clear in the thin air of Davos. As the Chinese and Indian economies continue to boom, their leaders' confidence mounts. After years of frustration and nagging inferiority complexes, India and China are preparing for the day they take the reins of the world. And in a world like that, be it in five or 15 years, there's no reason to think the dollar will keep its status.
This is not an investment recommendation. It's a very long-term prediction. In any case, making predictions in the currency market is a sure way to lose money. But if you're putting aside money today for your pension tomorrow, or saving for the grandkids, think about this. One day America won't be preeminent anymore, and neither will its currency.