That was the year that was. Life returned to share markets around the world. The rising stars shone most brightly, but even the old markets of the West showed a lively turn of pace from the March 9th lows. More liquidity works wonders.
Now we can look back, we must ask why did the authorities so starve banks and markets of cash in 2008, and why did it take until the early months of this year to cut interest rates and create enough cash to start to mend things? It made 2009 a game of two parts. The first ten weeks was a savage bear market, the rest was easy money.
We started investing the cash before the market turn, and moved to being pretty fully invested in the second quarter. Later in the year we added property REITs and commodity index investments to our share and bond positions whilst taking some profits on US shares. Asian property did well in the second half, and commodities finished very strongly. It was not difficult to make people money in 2009, as the cash created by the Fed, the Bank of England and others moved swiftly into shares, bonds and commodities. China helped by making major expansionary injection of funds into its economy, and by stockpiling raw materials at the lower prices.
Next year interest rates will rise. The Fed and the Bank of England are briefing that they intend to keep their indicative rates low for a long time. However, the government bond markets may think otherwise and move longer term interest rates up. In the UK the private sector already expects a considerably higher rate than 0.5% for savings, and banks are extracting many times the bank rate when lending. The argument will be over the borrowing rate for the government itself, which has been kept artificially low on both sides of the Atlantic by quantitative easing, which is now coming to an end.
Against this background it will be necessary to be more selective about which markets and asset classes to stay with or to invest in. We doubt if we will repeat anything like the returns of 2009 in the main share markets. We will go into 2010 with lower share exposure than we were running during the best of the markets in 2009.