At this time of year, prognostication rules the roost. En masse, economists, analysts and media pundits offer up their forecasts for the next 12 months. Newspapers, magazines, the airwaves and the web are inundated with prophecies and divinations for 2010.

I am loath to make predictions. At heart, I am a value-driven stock-picker and base my decisions on a lot of painstaking analysis and research. There’s no room for guesswork. Nevertheless, poring over the tea leaves of late 2009 is a useful exercise. Investing trends ebb and flow, and we can make some assumptions about how events may unfold in 2010.

We are in a stock picker’s market. At the time of writing, the Toronto Stock Exchange was up about 53% in value from March lows. I believe the market still has room to grow. Despite recent gains, TSX investors still need to recover about 31% in value to reach the highs of 2008. The fundamental sales and earnings performance driving the share price of many firms is intact. We will no longer see the dramatic gains we enjoyed over the last nine months but I expect there will be a lot of opportunity for strategic investors.

There are a host of hard-to-call intangibles out there — especially in the U.S., the economic engine that drives global growth and confidence. No matter where you sit on the political spectrum, I think there is much agreement that U.S. President Barrack Obama has had an extremely challenging first year in office. He has made solid progress on a number of initiatives, but the jury is still out when it comes to efforts to restore some key sectors of the U.S. economy.

But the White House can’t do it alone. The banks need to start lending again, consumers need to start spending and the real estate market must stabilize. The global economy will breathe a collective sigh of relief when the U.S. is once again on solid financial ground. We are on the right track, but we’re not there yet.

For me, the good news is that equities markets are looking choppy. Exchange-traded funds may lead returns in red-hot bull markets, but they lag when the index shuffles and dodges within a defined trading range. Active fund managers with a penchant for finding that little-known diamond in the rough are well positioned to trump the index funds. I expect 2010’s bumpy ride will be a great opportunity for many active fund managers to showcase their talents.

Unfortunately, the bulk of investors missed out on the 2009 recovery. Burned by the events of 2008, many were in a cautious mood, sitting on the sidelines or limiting their exposure to conservative balanced and fixed-income funds. We’ve seen only a trickle of new money go in to the markets. In November, the Investment Funds Institute of Canada reported total fund assets of $586.3 billion. That’s up by less than 3% from the $571.3 billion in assets reported at the onset of the global financial crisis in October 2008. Skepticism runs deep, and I expect this trend will continue through 2010.

This conservative investment climate will test the mettle of financial advisors. Clients will be giving off some very confusing mixed signals. They are anxious to recover past losses but, at the same time, are risk-averse and unwilling to stomach any short-term volatility. The value of independent financial counsel will be scrutinized like never before.

So, my take on 2010 is ultimately more prescriptive than predictive: there is no magic elixir to beating the markets. We are entering a new world of low investment returns, and expectations need to be adjusted accordingly. Let your principles guide you and focus on what you can control — diversification, risk tolerance, asset mix and investment quality. IE



Don Reed is president and CEO of Toronto-based Franklin Templeton Investments Corp.