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Hedge funds crash, Apple uncool in 2011

Hedge funds crash, Apple uncool in 2011
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First Published: Tue, Dec 28 2010. 08 25 PM IST
Updated: Tue, Dec 28 2010. 08 25 PM IST
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, once a year this column also makes some predictions—but only so the economists have something to giggle over.
With that caveat in mind, here are 10 things that might (or, as likely, not) happen in 2011:
No. 1: The 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.
No. 2: The alternative-investment industry crashes. The main driver of hedge funds and private-equity funds was the search for yield. With stock markets 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% 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?
No. 3: Venture capital returns. The start-up industry took a terrible beating from the dot-com 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 some blue-sky optimists—and 2011 will be the year that venture capitalists fill that slot again.
No. 4: France gets smoked out in the euro crisis. Somehow, France has managed to get itself grouped along 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 massive demonstrations. It can’t last. Next year will be when France wallows with Ireland, Greece, Portugal and Spain.
No. 5: The Apple Inc. backlash starts. We used to think International Business Machines Corp. (IBM) 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.
No. 6: The 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.
No. 7: Lloyds Banking Group Plc gets broken up. The hastily assembled merger between two of Britain’s largest banks, Lloyds and HBOS Plc, increasingly looks like one of the more catastrophic decisions made during the height of the credit crunch. It is too powerful. This will be the year it gets split apart.
No. 8: Iceland 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. 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.
No. 9: Russia 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 the BRICs—Russia. It tends to get dismissed as a raw materials supplier with an authoritarian government. But it’s trying to recreate itself as a technology powerhouse—look at the plans to create a new 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 could yet outshine the B, I and C in the acronym.
No. 10: A 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. Frankly, I’d rather get another email from that friendly Ukrainian company that supplies Viagra without a prescription. By Christmas 2011, sending out e-cards will be socially unacceptable— and not too soon.
BLOOMBERG
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First Published: Tue, Dec 28 2010. 08 25 PM IST