Here they are, courtesy of Cazenove:
Now, go back a year and imagine you had bought the dogs of 2008.
This would have been a very profitable investment strategy: an equally weighted basket consisting of the top 10 biggest fallers would have gained 130 per cent this year, outperforming the wider market by in excess of 100 per cent says Cazenove’s Darren Winder. (And note the 2008 dog basket would have included RBS and Lloyds — two of this year’s dogs ).
But would buying a basket of this year’s laggards be the best way to outperform (albeit not by such a huge margin) in 2010?
Winder thinks it could be:
While 2008′s worst perfomers were predominantly mining and financial companies, repeating the exercise to establish this year’s worst performers as we near the end of 2009 inevitably produces a very different list. Excluding RBS and Lloyds (which appear in the list of worst performers for both 2008 and 2009 to date), around half of the list are defensive companies on depressed PERs, and with estimated 2010 dividend yields in excess of 5%.
Consequently, the opportunities for capital growth within the UK market in 2010 are likely to be more limited than they have been this year, with those sectors which have almost doubled year to date highly unlikely to do so again. 2010 is unlikely to see sector rotation of the magnitude seen this year; instead, we expect a more broadly-based strengthening in equity returns in 2010, with cyclicals continuing to offer upside as confidence in the economic outlook continues to improve, and with valuations in more defensive sectors likely to return to more normal levels.
With most defensive sectors not having witnessed the sort of correction and subsequent recovery in earnings estimates seen in more cyclical sectors, any period of outperformance is likely to need to be driven by multiple expansion, or at least multiple expansion within defensive sectors relative to the rest of the market. To drive such an expansion, the characteristics which have fallen out of favour this year, such as yield and a defensive earnings profile, will once again need to be valued by investors. As mentioned above, we see around 10% upside in the FTSE 100 from its current level which, with the UK market currently offering an estimated dividend yield of 3.7% in 2010, amounts to a total return expectation of around 14%.
And he could well be right, especially if the exit strategies for monetary policy and efforts to tackle the huge fiscal deficits eventually derail the economic recovery and trigger a double dip recession. Remember contrarian investment strategies (obviously) work best at big turning points.
That said, anyone betting against this year’s winners, would be backing problems in emerging markets and a meltdown in commodity prices (and luxury trenchcoats):
Although they could certainly be forgiven for banking some profits.
Related links:
Petropavlovsk misses out – FT Alphaville
[Outlook 2010] How will analysts fare? – FT Alphaville