Investing in the next decade

Financial author Rodney Hobson weighs up opportunities and risks for the investor in the next ten years:

The noughties have behaved badly for stock market investors. Could the teens be as bad? As weather men who predicted a mild winter have demonstrated, the further out you forecast, the harder it is to be right but there are several reasons to believe that the next ten years will be more pleasant than the past decade.

It is rare indeed for the main stock market index to find itself lower at any point in time than it was five years earlier. To lose ground over ten years was unheard of before the start of the 2000s. So was suffering two bear markets in one decade.

Here in a nutshell is the grim record of the noughties: the FTSE100 down 1500 points over ten years; two vicious bear markets, one lasting three years during which shares halved in value; and a global downturn that included the longest recorded UK recession.

Still, as the British are inclined to say, we mustn?t grumble. The next decade will be better and the London stock market has already demonstrated its confidence with a great surge throughout the summer and autumn of 2009.

Some sectors that have been troubled offer tremendous opportunities for investors. House builders spring to mind. The housing market collapsed because the supply of cash to buy homes dried up, not because there was anything intrinsically wrong with the housing market. The pent-up demand for new homes is still there.

It will take time for banks and building societies to step up their lending but that will happen sooner rather than later. For a while, at least, lending will be more sensible than during the excesses in the last decade and that actually helps the house builders. A steady flow of new homeowners will bring a stability that was badly lacking when a flood of new house-buyers entered the market, encouraged by cheap mortgages.

And what of the battered banks themselves? They will recover. Banks always do. The chastening experience of the past two years should instil much needed discipline into the way they run their businesses.

Other sectors have been less heavily punished but will continue to offer investment opportunities throughout the next ten years. Supermarkets readily come to mind. Food and drink remain essentials, and the bitter price-cutting wars that were a feature of the noughties have receded. This will always be a tough sector to operate in and Tesco will continue to call the tune for now. However, Sainsbury and Morrison, have both demonstrated that you can lose your way badly and still make a comeback. Tesco will not, necessarily be the dominant force in 10 years time, although it should still reward its shareholders handsomely in the meantime.

Elsewhere in the High Street, retailers are more problematic. The switch to buying on the internet will continue but shoppers still want to see the goods in the real rather than the ethereal world. This suggests shops that combine these two approaches will fare best but fortunes will wax and wane as they have done over the past ten years. This will be a sector for the more nimble investor who buys and sells over a short timeframe rather than for the investor who likes to lock shares away for the long term.

Oil and gas will continue to offer great opportunities, though this will always be a risky sector as there is never any guarantee where oil will be found or whether it will be found in viable quantities. While we know from the experience of the noughties that the price of crude can be highly volatile, the underlying trend is inexorably upwards. Replacement sources of energy, such as biofuels, wind and wave power, are largely unproven and will take years to develop.

Likewise, mining and metals have been lucrative sectors for investors over the past ten years. Demand continues apace despite the setback of the global recession and share prices are expected to hold onto the levels achieved over the past ten years.

Health services, including nursing homes, will also see a continued increase in demand as the population ages. The danger for this sector is that cash-strapped local authorities and the National Health Service will fight to hold down their payments for these services, a phenomenon that is already in evidence.

In contrast, the leisure industry may find the going tougher. Already we are seeing overstretched consumers belatedly paying off their excessive debts. Saving will become more attractive for those with spare cash as interest rates start to rise after the general election.

It is true that the best share buying opportunity has gone. Twice during the 2000s the FTSE100 index slumped to 3500 points as we stared into the abyss. Yet the markets held their nerve and we are unlikely to see those levels again. On both occasions it was one overrated sector causing all the mischief, first in the dotcom boom and then in the banking excesses. Both sectors are still with us, in a more sober state, and they will thrive in the next ten years.

The FTSE100 started the past decade at its record level of 6930 points. At some stage over the next ten years we shall see that barrier smashed. Enjoy the ride.

Rodney Hobson is a financial author. His latest book Understanding Company News has just been published by Harriman House and is available to purchase through the Selftrade bookshop.