Seven potential 'trades of the decade'

MoneyWeek's first issue came out ten years. In that time, we've backed several different themes some we've got right (such as the rise of the East, and the inevitability of the credit crunch), some we've got wrong (Japan so far). But without a doubt the best trade of the past decade has been 'buy gold'. So what will the top trades be between now and 2020? We asked seven experts for their opinion.

Buy UK large-cap blue-chips and Japan

James Ferguson

Socrates reportedly said (he never wrote anything down, sensible man) that he was the wisest man alive because he knew one thing: that he knew nothing. The advantage of looking out over the next ten years is that we can be pretty sure we know nothing about what will happen, nor what the world will look like.

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Even with the benefit of hindsight, it's not always easy to spot the best trades. Take China. The Chinese market has only risen an average of 4.7% per annum (pa) over the last ten years. The secret was to miss the 50% drop over the first five years of the last decade, then buy in June 2005 at the lows, before selling out again in October 2007 with your 500% profit.

Clear winners over the last ten years include the euro (+5.1% pa), UK gilts (+5.6% pa), UK house prices (+7.6% pa), oil (+9.9% pa) and, of course, the darling of the hour, gold (+17.6% pa), which started its run bang on cue almost exactly ten years ago.

Of these, the first three look pretty tired. And who knows how much longer any of them has to run: one year, two, perhaps three at most?

To find an asset class with a real chance at performing through the next decade, we need to find something less volatile than China, but that looks today like gold, or house prices, or oil did ten to 15 years ago, ie, out of favour. Here we wheel out our secret weapon: the power of mean-reversion. Stuff that did well over the last ten to 15 years largely didn't do well over the previous period. The other key thing to look for is that such a period of initial underperformance had to have left the asset in question looking fundamentally cheap, so that a year or two of outperformance wouldn't signal the end of the run.

Over the next ten years, peak oil will surely become more of a story, but oil's past decade hasn't been lousy, so perhaps too much is in the price already. Water is another option, but hard to invest in. For me, two assets stand out. The first is UK high-yield, large-cap, blue-chip stocks. The FTSE 100 is down almost 1% pa over the last decade. In a very low-yield world, either things stay disinflationary, in which case high-yield stocks will be bought for their dividends; or the authorities are successful in reflation, whereupon the high barriers to entry these firms benefit from should allow them to pay inflation-beating dividend hikes. Almost half the FTSE 100 stocks yield more than ten-year gilts, while the average yield of the top ten is more than 6.5%.

The other asset class I like is Japan. The market has underperformed for far longer than the normal demands of mean-reversion would require. But it's only recently that the fundamental proposition has become truly compelling just as investors seem to be entering a full-on revulsion phase. Between 1958 and 2000, Japanese firms' pre-tax profit margins ranged from 1%-5%. Today, they stand just below 6%. Even after doing nothing for a decade, FTSE stocks still trade at nearly twice book value and one-times sales. Japanese stocks trade at half those values; below book value and on 0.48 times sales. The average dividend yield is more than even the longest-dated government bond too.

James Ferguson is head of strategy at Arbuthnot Securities. He also writes the Model Investor newsletter.

Bag BP it's a play on gas as well as oil

Simon Caufield

Rising interest rates will be the most important financial theme of the next decade. Many governments have so much debt that default and/or inflation are the only way out. Yet ten-year US Treasuries yield only 3%. We have become so used to low rates supporting asset markets that few investors are ready for the impact of higher rates. But I won't choose shorting government bonds as my trade of the decade. Say the yield on ten-year Japanese government bonds rose from 1% to 6%. You'd make 36% being short. That would be a vital hedge if your other assets fall. But there is more to be made elsewhere.

As the world is running out of cheap oil, I'd choose an energy play: natural gas. At today's price of about $4 per thousand cubic feet, gas is 70% cheaper than oil. The price should rise sharply over the decade. Electricity generators and large commercial vehicles will convert from other fuels to take advantage of lower prices and emissions. Alternative energy is costlier than it looks and less reliable. Demand will rise with economic growth, especially in emerging markets. And US onshore shale gas explorers will restrict supply. Under the terms of their leases, they must keep drilling or forfeit the land. But many will run out of money soon.

Suppose the oil price returned to $147 per barrel. The energy-neutral price of natural gas would be $25. That's six-times today's price. Investing in natural gas is not easy. Don't choose the exchange-traded fund (ETF). This owns one-month futures contracts rather than physical gas. Each month, it sells its contracts, which are now close to the spot price, and buys new ones. Futures prices tend to be higher than the spot price (this is known as 'contango'). So the ETF makes a loss each month even if gas prices are static.

You could choose one of the many natural-gas explorers. But you'd have to know which will find the largest, cheapest and most sustainable sources. Instead, my pick would be BP (LSE: BP). Although we know it as an oil company, 42% of its reserves are actually natural gas. Now that the Gulf of Mexico well is capped, the cost of the accident can be estimated. And BP has taken a charge of $39.9bn in its second- and third-quarter earnings. Even at today's gas price, it trades at a mere six times 2011 earnings. You don't get that kind of opportunity every decade.

Simon Caufield writes the True Value newsletter .

Join the new gold rush bioscience

Jim Mellon

Technology is changing faster than ever. All around us, superficial evidence of that abounds iPads, iPods, laptops, self-service at supermarkets, electric cars to name just a few examples. But what we see is just the tip of the iceberg. The biggest change of all the revolution in what might loosely be described as medicine may be less visible right now, but will have profound effects on us all in the coming years.

Ray Kurzweil, in his book The Singularity Is Near, proposes that by 2045 (how he can be so specific I have no idea), machine or artificial intelligence will have overtaken that of our own species. This is the so-called 'singularity'. This massive advance in computing power, combined with several other factors the sequencing of the human genome and its widespread application in drug testing; the use of stem-cell therapies to 'regrow' vital organs; the use of nanobots to deliver therapies in less invasive, more effective ways; and the predictive power of computing to 'personalise' medicine and to improve life expectancy will mean that before long (within ten to 20 years) all known diseases will be curable, if not cured. The broad implications of this are vast here are just a few of them.

1. Life expectancy throughout the world will rise dramatically perhaps to 130 to 140 years at birth in the developed world within 20 years.

2. Population growth in almost all parts of the world will taper off, before populations start to decline (as people live longer, they have fewer children).

3. Advanced robotics will develop in tandem with bioscience to cater for the needs of rapidly ageing populations.

4. Big pharmaceuticals firms will become vehicles to acquire biotech companies and to distribute drugs and other therapies.

5. All industries will be affected from insurance to casual dining to the media.

6. The bioscience industry itself will be an incredible place to make money; but the techniques for successful investment will be akin to mining: backing lots of small investments hoping one or two strike gold.

This is the new gold rush and I'm off with my pick, shovel and high hopes to California. I'm heading to San Francisco, home of this new(-ish) industry to write my next book on the subject.

Since I am a neophyte, the science will be imperfect, but hopefully the outcome will be positive. I'll be updating those who are interested in this trade of the decade through a free newsletter you can sign up at Wakeupnewsletter.com.

Jim Mellon is chairman of Burnbrae Ltd.

Invest in infrastructure

Tim Price

As Ben Bernanke, chairman of the US Federal Reserve, has pointed out, "the economic outlook remains unusually uncertain". Trying to identify a key asset for the next year is difficult enough doubly so when it comes to the hugely manipulated freak show that passes for the current financial markets.

But for the next decade? I'd obviously be happy with either gold or silver, but you can turn to my fellow contributor Dominic Frisby for more on that. I wouldn't feel comfortable being locked into bonds of any sort for the next ten years; the risk of rather uncomfortable inflation rearing its head at some point seems too high to me. Property, I dare say, might hold its own or advance in nominal terms, but I'm not sure it will thrive during a period of ongoing deleveraging. So I'm left endorsing equities, and particularly high-quality, defensive UK stocks.

The equity sector that most interests me is energy and infrastructure. To me, this is one of the most compelling global, long-term investment themes. Rather than simply buying oil majors, for example, I prefer support services firms, which you can treat as arms dealers who are ultimately dispassionate about who ends up winning the energy war.

My favourites include the likes of Amec (LSE: AMEC), Rotork (LSE: ROR) and Weir Group (LSE: WEIR). The sanity/defensive check is the Altman Z Score, which essentially shows how recession-proof a business is. All of these firms score highly. I also anticipate prolonged sterling weakness, which should benefit these businesses, given their international presence. So whether we end up with deflation, inflation or both, productive assets like these strike me as a sane choice in the midst of an insane financial market.

Tim is director of investment at PFP Wealth Management and writes The Price Report newsletter .

Buy the worst land in Florida

Swen Lorenz

Today's economic climate offers the chance to pick up first-class assets at fire-sale prices. It reminds me of how things felt in 1991. I was attending high school in the US. The property market was still suffering after the bursting of the 1980s real-estate bubble. Worst hit was Florida. Entire condo buildings remained empty and prices had fallen by 40%, 50%, or even 70%. I met one guy brave enough to pick up Florida real estate for a song. Why did he buy when no one else had the nerve? He summed it up in just one sentence: "Everyone I know wants to move to Florida!"

The Sunshine State is part of the country that remains the world's largest economy. It has a stable legal system and secure property rights plus lots of sunshine. Florida will maintain its fundamental attractions and recover (and reach new heights), just as it did back in the early 1990s. So given that we are looking at an investment horizon of ten years, I'd be daring and buy land in a part of Florida that is currently as down-and-out as could possibly be.

The northwest of Florida is the last undeveloped part of the state, primarily because of a lack of infrastructure. During the last boom, the area was hyped as 'up-and-coming'. It's now back to being neglected, because you can currently buy discounted property in more established areas, such as Miami or Orlando.

There is no bigger property owner in this area than St Joe Company (NYSE: JOE). Thanks to huge purchases of forests, dating back to the 1930s and 1940s, St Joe is sitting on an incredible 2.3 billion square metres of land. The last great property boom took the share from $8 to $85, and now it's back to $20. A famous short-seller recently launched a stinging attack on the firm, claiming its assets are worth only $7 per share. Yet the stock didn't actually fall that much further. This is a clear sign that pessimism is now at its peak and the share has reached its bottom.

Each share of St Joe is equivalent to owning about 25 square metres of land in Florida. A lot of it is wilderness; not all of it fit for development. But if I was offered the chance to buy land in Florida for about a $1 per square metre, could I really go wrong? And is there enough upside to justify putting it away for a decade? I'd be happy to bet the house on it.

Swen Lorenz ( www.undervalued-shares.com ) is a private investor. He lives in London and the Channel Islands.

Go for gold

Dominic Frisby

Two huge stockmarket busts in the last ten years, along with the global financial crisis, have led people to question the effectiveness and fairness of our modern system of fiat money and credit.

With central banks printing money and adopting deliberate policies of forcing savers to speculate with their hard-earned cash, it's no wonder people are disillusioned. As a result, I see two huge trends developing over the next ten years: the emergence of alternative, non-government currencies and, as a result, the implosion of the government bond market.

Sick of poor returns on their money, I believe that more individuals will start to store their wealth in alternative currencies, such as (although not necessarily exclusively) precious metals. Meanwhile, growing numbers of businesses will demand payment for their goods, services or labour in currencies whose purchasing power lasts. This will be seen in trade especially, across borders or across the internet indeed, it is already possible to make and receive payment across the net in hard currency.

As a result, the monopoly of existing government currencies will be broken and thus the power of the governments that issue them will be eroded. In order to make their fiat money desirable and competitive against these new, alternative currencies, interest rates paid will have to rise. If they don't, inflation will decimate their purchasing power.

Any new currency that manages to win the confidence of a significant group of users is bound to be backed at least partly by precious metals. So my two trades of the next decade are: stay long gold, and, in time we're not quite there yet short government bonds.

Read more from Dominic every week in our free Money Morning email .

Find adaptable management

Julian Pendock

Identifying the trade of the decade normally entails a single asset (such as gold), or a geographic region (such as China). The problem with such single bets is that they tend to be binary they're 'win or lose' plays. The under-appreciated reason for this is that they prosper or founder on account of politics. Gold has prospered, arguably, due to the growing politicisation of central banks and hence a loss of faith in fiat currencies.

China, meanwhile, is the new 'big thing' in terms of specific regions. China's advantages are the sheer size of its population, and its cheapness. But investors should be warned: tensions are growing in China. If there's one thing we've learned about authoritarian regimes, it's that they often appear stable right up until the moment they shatter, leaving economic chaos in their wake.

So given that we can't predict the future, and given that falling in love with a single idea is dangerous, how can we plan ahead? I have learnt that the key to investment success is adaptability. There are three main reasons why you should invest in companies whose management is adaptable.

Firstly, adaptable companies make good use of new technology. Predicting which technologies will dominate in a decade's time is nigh-on impossible, but it's managements' job to keep abreast of trends and turn them to the company's advantage. A case in point would be the US video and DVD rental store Blockbuster. It launched in 1987 and was sold to Viacom for US$8.4bn. But the firm is now in Chapter 11 bankruptcy, after management failed to adapt to the internet. Rival Netflix, on the other hand, has thrived, with video-on-demand and mailed rental DVDs.

But timing is key. The tech bubble of the late 1990s was driven by the realisation that the internet would change the world which was true. But picking real winners when a technology is in its infancy comes down to luck as much as judgement, as the plethora of 'dot-gones' and huge overcapacity of fibre-optic cable infrastructure showed. The same goes for research into new products. Research and development (R&D) spending is all very well, but it's irrelevant if it doesn't lead to products that sell. This is one problem mobile-phone group Nokia has had, for example spending ever greater amounts on R&D hasn't helped it to achieve its goals.

Secondly, adaptable firms are attractive from a value point of view. When countries experience political or economic upheaval, investors often write them off entirely. That means that if you can find firms that still manage to thrive and adapt in such climates, you can pick up some bargains. Italy, for example, for all its political problems, is home to some very well-run companies, such as Fiat (IT: F) (we used to own Fiat shares) and Piaggio (IT: PIA) (where we still have a stake).

Lastly, in a globalised world, understanding the consumer is vital to success in new markets. Adaptable companies should be able to take advantage of new geographic markets, which prove to be profit graveyards for other, less flexible, rivals.

Julian Pendock is chief investment officer and founder of Senhouse Capital.

This article was originally published in MoneyWeek magazine issue number 511 on 5 November 2010, and was available exclusively to MoneyWeek subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.