Economy Will Drive Stocks in 2010; Part 2 of 2

“Calling the Trend” Column, by George Leong, B.Comm.

The leader in 2009 has been the technology sector. Innovation in technology was the driver and I feel that technology will continue to lead markets in the years ahead. Simply, there is really no other area where the innovation and advancement is as high. Investors will always pay for innovation and new technologies. The only other sector may be biotech, but there is higher risk there.

As we move forward, I continue to favor technology as one of the top growth areas in 2010. When you buy technology stocks, you buy innovation and advanced technologies. Yes, you could play it safer and buy cyclical stocks, but you will not get the same potential upside as you would when buying technology stocks.

The signs for the economy and earnings are encouraging, especially in the technology sector, after recent strong earnings from Oracle Corporation (NASDAQ/ORCL) and Research In Motion Ltd. (NASDAQ/RIMM).

Within the technology area, I like the market leaders, but, at the same time, I also favor smaller technology companies that have interesting technologies, rather than buying established large-caps such as Microsoft Corporation (NASDAQ/MSFT) and Intel Corporation (NASDAQ/INTC). Don’t get me wrong; companies like MSFT and INTC are the “best of breed” and you should have a position, but, for the real price appreciation potential, you need to add some small technology companies. In the long-run, small companies tend to outperform, especially at the earlier stages of growth. I feel this will happen in 2010 and in the decade ahead.

I am a Chinese Bull, as many of you know. I do not see any major country having better growth opportunities than China. In addition, you can play the Asia Pacific region by playing Chinese stocks, as many Chinese companies are beginning to scout for trading opportunities outside the Great Wall of China. The Wall may have been initially built to keep out the “foreign devils,” but things have changed in the approximately 2,700 years since its construction. Capitalism is now highly welcomed, albeit there remains the risk of higher and unexpected governmental interference from the Communist regime. Yet, ignoring this, the economic machine in China continues to burn on all cylinders. If the U.S. was a “Dodge Caravan,” China would be a “Ferrari.”

The World Bank recently increased its economic growth forecast for China in 2009 to 8.4%, versus the previous 7.2% estimate in June. The increase was attributed to the major economic stimulus plan that has helped to drive infrastructure spending across the country and build more capacity. China’s GDP growth is predicted to rise to 8.7% in 2010 by the World Bank. Yet, the World Bank also said that sustainable growth will need to be driven by “more emphasis on consumption and services and less on investment and industry.” This makes sense. Traditionally, the Chinese are savers, but, for the country to grow, consumers will need to increase their spending habits. Only about 20% of China’s GDP is due to consumer spending, versus about 70% in the U.S. As consumers spend more, it will help to drive economic growth.

The country’s President, Hu Jintao, wants to increase the country’s domestic consumption and cut its dependence on exports. Think about it, China currently needs buyers for its goods; otherwise growth suffers. The U.S. has been a major trading partner, but the decline in consumer spending has reduced the demand for Chinese-made goods. So what you have are plants with excess capacity and that are idling, waiting for foreign demand to rebound. This is dangerous and is a key reason why the country wants to boost its domestic consumption of Chinese goods. Longer-term, this will help China in its pursuit to become a dominant world economic power.

If the country’s per capita income continues to rise and people continue to spend, we could see incredible growth in China and less of a reliance on foreign demand. With over 1.3 billion people and a middle class of about 300 million, you have the foundation to generate demand.

China, which has historically been known as a country of savers, is beginning to look more like other industrialized countries as far as debt goes. Financial institutions in China have been pushing credit cards and, according to the South China Morning Post, debts on credit card surged 126.5% year-over-year in 2009. There are estimated to be about 175 million credit cards in China.

I continue to believe that there are good buying opportunities in Chinese stocks, specifically of the small-cap variety, but you should be cautious. Chinese stocks listed in the U.S. will continue to represent an excellent area for growth investors; yet you also need to be careful and be diversified in your portfolio, as there could be more downside risk.

I remain positive on gold. There is massive demand for gold reserves out of India and China and this will continue to help add support and drive up the price of gold. Add some gold as a near-term and longer-term investment.

While 2009 returned some nice returns for stock market traders and investors, I also feel that 2010 will be positive, assuming the economy continues to steadily grow and does not have a relapse. While I do not like to put concrete targets on the market indices, I feel that gains in the neighborhood of 10% to 20% may be realistic, but it depends on the strength of the economy recovery in the U.S. and globally. Also don’t forget that much of the gains in 2009 will have been discounted into 2010, so, for us to achieve strong gains, there must be a fresh catalyst. The jobs market will need to produce jobs and housing prices will need to rise. It will not be easy, but I’m encouraged by what we have seen.