Keep this piece for a year to see at the end that "that was the year that was", writes Matthew Lynn.
THERE is an old joke that economists only make predictions so that the weather guys have someone to laugh at. In much the same spirit, this column will make some predictions for 2011 but only so the economists have something to giggle over.
1The bull market returns. Actually we've already been in a bull market for more than a year. Just take a look at the figures. But in the early stages of a rising equity cycle, no one says it's a bull market. First they call it a dead-cat bounce. Then they call it a bear-market rally. By the end of 2011, the penny will have dropped. We'll be officially back in bull territory. By the close of the year, everyone will have started piling back into equities again.
2The alternative-investment industry crashes. The main driver of hedge funds and private equity funds was the search for yield. With sharemarkets in the doldrums, interest rates cut to almost nothing, and bond yields at record lows, investors were desperate for any kind of meaningful return on their money. They were willing to listen to slick hedge fund managers who promised to make 30 per cent a year on high-velocity yak-hide arbitrage. Next year, interest rates will be rising, and so will bond yield and equity returns. Why bother paying a fortune to hedge and private equity fund managers, few of whom deliver on their promises, when you can get pretty decent returns from mainstream investments?
3Venture capital returns. The start-up industry took a terrible beating from the dotcom crash. But as a rough rule, a decade is long enough for the financial markets to forget everything. There are fantastic opportunities out there: smartphone apps, social networking, alternative energy, Africa. The markets always have space for blue-sky optimists and 2011 will be the year that venture capitalists fill that slot again.
4France gets smoked out in the euro crisis. Somehow France has managed to get itself grouped with Germany as one of the strong euro nations. But it runs a bigger budget deficit than Italy. It has chronic unemployment and little growth. Crucially, it has the greatest resistance to reform. The merest suggestion of extending working hours, or retirement ages, or reforming public services, prompts huge demonstrations. It can't last. Next year France will wallow with Ireland, Greece, Portugal and Spain.
5The Apple Inc backlash starts. We used to think IBM Corp was sort of sinister. Then it was Microsoft Corp. But which business today has far too much power, is run by control freaks and puts profits before principles? That's right. The world's third-biggest company, measured by market value, is about to discover that the line between cool upstart and ugly monopolist is a very thin one.
6The German model is back in fashion. The words "German" and "fashion" go together about as well as "Greece" and "solvent". But in a world trying to figure out how you get out of a debt crisis, the Rhineland model of capitalism is suddenly going to seem very appealing. Lots of mid-size companies, with huge technical expertise, low debt and skilled workforces exporting niche products to the whole world that sounds like a pretty good formula for success in the 2010s.
By the end of 2011, expect every chief executive on the planet to start talking earnestly about how they are looking to a German management model as their
guide.
7Lloyds Banking Group gets broken up. The hastily assembled merger of two of Britain's largest banks, Lloyds and HBOS, increasingly looks like one of the more catastrophic decisions made at the height of the credit crunch. It is too powerful. This will be the year it gets split apart.
8Iceland teaches the world a lesson. Two years ago, every government in the world bought into the idea that you had to bail out your banks. If they collapsed, you would go straight back to the Stone Age. But one country defied the consensus. Iceland couldn't afford to keep its banks going. What happened? There's been pain, sure, but from next year on the economy should be growing again, inflation is under control and interest rates are coming down. If Iceland keeps recovering, only one conclusion is possible: You don't need to bail out banks after all.
9Russia puts the R back in BRIC. We've heard a lot about the rising economic power of Brazil, India and China. A lot less has been heard about the R in BRIC Russia. It tends to be dismissed as a raw materials supplier with an authoritarian government. But it's trying to recreate itself as a technology powerhouse look at the plan to create a Silicon Valley in the Moscow suburb of Skolkovo. Crazy? Remember, this was the first country to put a man into space. Russia has always been scientifically advanced. If it can bring its brains and businessmen together, it may yet outshine the B, I and C in the acronym.
10A backlash against Christmas e-cards. Do I really need festive greetings from a small bank in Latvia I've never spoken to? Is that Austrian management consulting firm sincere in wishing me the best for the holiday season? I doubt it. Listen up, guys. It's not thoughtful. It's not touching. It's spam. By Christmas 2011, sending out e-cards will be socially unacceptable and not too soon.
Matthew Lynn is a Bloomberg columnist and the author of Bust, about the Greek debt crisis.
Frequently Asked Questions about this Article…
Does the article predict a return to a bull market by the end of 2011?
Yes. The article’s author, Matthew Lynn, argues that equity markets have already been rising for more than a year and predicts that by the end of 2011 investors will accept that we’re back in a bull market, with many people piling back into stocks.
Will hedge funds and private equity perform well in 2011 according to the article?
No. The article predicts a crash in the alternative-investment industry (hedge funds and private equity). As interest rates and bond yields rise and mainstream equity returns improve, investors will be less willing to pay high fees for managers who often fail to deliver promised returns.
Does the article say venture capital and startup investing will improve in 2011?
Yes. The article expects venture capital to come back into favour, citing attractive opportunities in smartphone apps, social networking, alternative energy and emerging markets like Africa — a bounce-back a decade after the dotcom bust.
What does the article predict about France and the euro crisis?
The article warns that France could be exposed in the euro crisis. Despite being grouped with stronger euro nations, France’s large budget deficit, chronic unemployment and resistance to reform mean it could end up struggling like Ireland, Greece, Portugal and Spain.
Is Apple expected to face a public backlash in 2011?
Yes. The article predicts the start of an Apple backlash, suggesting that the company’s power and tight control risk shifting public perception from ‘cool upstart’ to ‘ugly monopolist’ as critics question its practices and priorities.
Will the German economic or management model become more popular with CEOs and investors?
According to the article, yes. In the wake of the debt crisis the Rhineland or German model — mid-sized, low-debt companies with technical expertise and skilled workforces exporting niche products — is likely to regain appeal, and CEOs will talk about adopting German-style management.
Does the article predict a breakup of Lloyds Banking Group?
Yes. The article argues that the hurried merger of Lloyds and HBOS left the combined group too powerful and predicts that 2011 will be the year the bank gets split apart.
What lesson about bank bailouts does the article draw from Iceland’s experience?
The article suggests Iceland’s post-crisis path shows that governments don’t always need to bail out banks. After allowing its banks to fail, Iceland experienced painful adjustment but then signs of recovery, implying that not bailing out banks can be a viable route.
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