Top trades for the “teen” decade?
Appreciation of the Renmimbi. This is our favourite bet for the first couple of years of the decade. Massive inflows of foreign currency, derived from the countries exports, will eventually force an appreciation of the Chinese currency. Overseas circulation and foreign ownership of the Renmimbi is restricted, but the Wisdom Tree Dreyfus Chinese Yuan Fund (CYB) offers a straight exposure for to the currency. The Chinese Renbimbi, or Yuan currently stands at 6.8275 to the USD. What might a reasonable upside target be? It is hard to say, but bear in mind that the rate stood at 8.11 in 2005.
Nuclear Power. Much has been written about the prospect of “peak oil”, and I do not wish to add to this debate. However, it is fair to say that in the face of rising demand, oil will more expensive and possibly harder to come by in the future. Meanwhile, in Europe supplies of natural gas are diminishing in the North Sea whilst supplies piped from the east are subject to political risk.
Hope for the future is placed on the growth of renewable energy technologies such as wind, tidal and solar. However, these sources of energy remain relatively small when measured against the world’s fast-growing demand. There are additional problems related to alternative sources, not least the dependence on the weather and the difficulty in aligning this with peaks of demand, particularly given the lack of effective storage technology. Growth will be seen in this sector, but production may not expand at a rate fast enough to met demand.
With signatories to the Kyoto treaty struggling to meet CO2 emission reduction targets, nuclear power appears to offer the best bridge for this energy gap. The drive to nuclear is international, with China currently building 17 plants with another 34 planned. South Korea, Japan and numerous other countries are jumping on the bandwagon and European plant constructor Areva has announced a target of 60 new orders by the early 2020’s.
So how should investors play this story? Uranium mining plays are one route. The Canadian Cameco Corp and Uranium One popular choices with US and Canadian investors. Investing in a “pure” nuclear infrastructure provider is rather harder, and will involve looking overseas. Amongst listed companies, Areva of France is fairly straightforward play, offering plant construction, fuel processing and range of services to the industry. Toshiba Plant & Systems and, of course, US-giant General Electric also build reactors, but these companies also have other activities with the latter having huge exposure to financial services. In the domestic market, investor demand for nuclear power assets has led to the issuance of the Nuclear Vectors ETF (NLR) by New York asset managers Van Eck Global who specialise in industry-specific funds such as alternative energy and agriculture. The Nuclear Vectors ETF holds a tight portfolio of only 17 stocks (which can be viewed on the company’s website). Consider also the LSE listed ETFX WNA Global Nuclear Energy Fund from ETF Securities. Nuclear power looks set to plug the energy gap until our next theme moves into play.
Alternative energy. Many commentators have highlighted this as the big growth story for the next decade. Certainly, this sector of the economy will grow, but investors should be wary; as with any sector based on new technology, there will be as many losers and as winners, and the early entrants may not last the course. Individual stocks may show dramatic performance, but a fund would be sensible option to spread the risk and weather the inevitable failures at the individual company level . ETFs Powershares Clean Energy (PBW) or the Market Vectors Global Alternative Energy (GEX) should fit the bill. UK investors should consider the Blackrock New Energy Fund. The last few years have seen these shares show strong correlation to tech stocks, so investors should be aware that share prices may not accurately track the underlying growth in this economic sector Follow these ETFs with the ETF Review, produced by Tarquin Coe.
Resources. This, of course, was one of the great plays of the last decade, with mining stocks enjoying “seven bagger” growth from the early part of the decade up to the peak in 2008.
The pullback was severe, perhaps 75% for the average mining stock (see chart of IBD sector index, right), shaking out much speculative money. Equally surprising was the strength and rapidity of the subsequent recovery. The charts suggests that basic story has not changed – demand from the fast growing economies in Asia are sucking in raw materials and will continue to do so for years to come. Against this background of growing demand lies a limited supply picture. In due course, the 2008 high will be taken out.
Wild cards. Bull markets have a nasty habit of emerging from where you least expect them. On this basis, alone, it may be worth considering Africa . The continent rarely features on the radar of investors, but consider that this region is showing the fastest growth of mobile phone generation in the world. What is more, many African countries are blessed with natural resources, placing the continent on a good footing for the coming century. It’s a wild card, but the potential for growth is enormous.
Another long shot is Japan – twenty years of recession and negative stock market growth. Bear in mind that we had to select a 1000-point a box size just to get the index to fit on the chart!
When the turnaround happens (eventually!), the recovery will be dramatic.
Over in Latin America, most investors are familiar with the growth seen in Brazil, but what about further south? The Chile IPGA General Index (IGPA) finished 2009 with its highest annual rise (47%) in 16 years. The final day of the year saw the index at its best level of the year as Chilean commodity stocks benefited from Chinese copper demand.
US based investors who bought the USD ETF saw even greater gains, as Chile’s peso gained 26% over the year against the Greenback.
The long-term chart shows the index moved back above its 500-day exponential moving average in 2009. Previous moves up through this average, have typically lasted for around 5 years, so the 2009 rally was just the start.
Additionally, the chart shows the strong outperformance against the FTSE World Index (FTWIWRLD). We expect Chile to continue to outperform during the tenties.
Exposure to Chile is possible through the iShares MSCI Chile Investable Mkt Index (ECH).
Now over to an individual stock. Apple Corp (AAPL) rose impressively during 2009, up 147% on the year. The stock has broken sharply out of a large expanding triangle that spanned the late 80s, the 90s and the early noughties. That pattern forecasts more gains ahead, as the breakout is only in its infancy, those gains could easily result in the stock doubling between now and 2020.
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Tiime for another dot-com boom? The Internet HOLDRs (HHH) currently tracks 13 internet stocks, of which Amazon and eBay have the greatest weighting. 2009 has seen renewed interest in this area following years of neglect with the aftermath of the dot com crash. The P&F relative chart against the S&P 500 illustrates this new appetite, with a sharp relative rally that fired up at the end of 2008.
The P&F price chart shows the fund on a tear towards the highs from 2007 and a break above those highs looks likely in 2010. That move, coupled to no overhead resistance to contend with, should see the share continue higher in the years ahead.
ETFs are analysed and traded every Friday in the ETF Review.
A recovery play? The Financial sector recently experienced the largest shock since the Great Depression. Despite this, the Financial select Sector SPDR (XLF) chart suggests that light is ahead. Price action has rocketed through a long-term downtrend line on the P&F chart and in doing so breaks the bear market of the last few years for the instrument. The fund is now expected to extend higher and revisit the 2007 highs around $38. The Financials have started the new decade on a great footing, and you can too by taking the US Hotline service - monthly subscriptions start at just $35.
Crude Oil is firmly in a long-term uptrend. The black stuff is following a rising trend channel, a path that started in late 1998. Momentum is not overstretched and neither is sentiment. If the old market adage that the “trend is your friend” holds true, then many new highs are likely to be celebrated by Oil over the next decade. Commodities are volatile, so the rise will not be plain sailing, but deep, spiky corrections, should be seen as buying opportunities. Follow the trend with our Commodities service for just $23/month.
And finally, nothing to do with securities, and well out of our area of expertise…….. Our London office is situated just up the road from a well known auctioneer. A quick lunchtime stroll through the show rooms and it is evident how far the fashion for furniture as swung in favour of the modern. Languishing in the sale rooms with low reserve prices are George III chairs, 17th century oak coffers and wonderful Victorian wardrobes, tables and more.
Antique furniture is no longer desirable for most householders and high-quality pieces from the 1800’s and earlier are on sale for prices lower than those than were been seen twenty years ago. Fashion, however, is fickle. A quick swing back into favour for traditional interiors could see prices recover swiftly. Why buy semi-disposable Swedish chipboard at Ikea when you can have a craftsman-made piece of history for the same price?
Best Regards, Tarquin Coe & Mark Glowrey