Simon Marsh: Why I'm watching out for the re-emergence of manufacturing

Were such an event to occur, it would undoubtedly make for a rough ride in both UK equity and bond markets. Therefore in the case of the latter we continue to prefer good-quality short-dated corporate bonds over UK government paper, notwithstanding they too would be caught by the wider downdraft of a crisis. Regarding the equity market, given that growth within the UK economy is at best likely to be anaemic, it is more important than ever to ensure you are not over-exposed to UK-centric businesses.

The good news is that the recovery in the wider global economy is gathering pace and the UK is home to a wide array of businesses – BP, GlaxoSmithKline, HSBC etc – that owe little to the success or otherwise of the UK economy given their international focus. Even Tesco now has more than half of its floor space outside of the UK. This is one of the reasons why we remain optimistic that the FTSE 100 will show further gains this year despite the horrendous state of the public finances.

Currency depreciation (not available to the Irish or Spanish) is also likely to accelerate the rebalancing of the economy and the re-emergence of manufacturing is a theme worth watching – not least as it is an area currently under-owned by investors.

We also continue to like the technology sector, driven in part by the emergence of the mobile internet. Between 1974 and 1984, a period of similar low growth and structural deficits, the technology sector in the US outperformed the broader S&P 500 fourfold and we expect continued outperformance in 2010. Our key picks in this area remain Imagination Technologies and Google.

This next decade will continue to see a continued shift in power and influence from West to East. The difference in this coming decade will be that the Bric economies will drive not only growth but also demand as their growing middle class start to consume.

If proof were needed that the traditional world order has turned upsidedown, you need only look at a city such as São Paulo. If economic prosperity were measured by the number of helipads, the 210 currently in operation in São Paulo surely makes it an absurdity to class economies such as Brazil’s as ‘emerging’.

Inflation on the cards

We believe that the real value of monetary assets, in particular cash, will continue to decline. Many Western governments (our own a particularly bad offender) continue to print money and it is inevitable that an expansion in the monetary base of this magnitude will ultimately lead to inflation.

While 2010 is likely to spring some surprises – some unpleasant – we expect markets to continue climbing the wall of worry, albeit investors will need to be more discerning and be prepared for some bumps along the way.