Looking back at 2010 it turned out a lot better than I expected. After the market rollercoaster ride of the last few years it was nice to have a relatively stable year.

The main indices returned the following:

German DAX +16,1%

European STOXX 600 + 8,6%

US S&P 500 +12,8%

US Dow Jones +11,0%

European STOXX 50 + 0,0%

But what to make of 2011?

Before I go on I must say that that I am not making projections (that’s a fools game) I am simply commenting on valuations I am seeing in the market and thinking of possible outcomes.

Since the March 2009 lows a lot of lower quality companies have had a hell of a run. These are companies to really be careful of, should there be a correction they will be particularly hard hit.

Be careful if you are holding companies with weak businesses or companies trading above market valuations or both. Amazon.com for example, trading on a price to earnings ratio of just under 78.

When private equity funds are planning on listing a lot of their businesses you know the market or that sector is fully valued.

I would also advise against investing in these new listings. As James Montier‘s research has shown investing in new listings is a recipe for bad returns.

High-quality companies, especially in the technology sector still looks undervalued.

The best examples are Microsoft and the large German insurer Allianz (I have a position in both).

Valuations are as follows:

Price to Earnings Dividend Yield

Microsoft 12 2,28%

Allianz 8 4,56%

Source: Financial Times

Other sectors that you may also find of interest are telecom companies in Europe, and utility companies in Germany.

Both sectors offer very attractive yields compared to the low interest rates you can currently earn on bank deposits or even long-term bond.

Here are a few examples:

Dividend Yield

Deutsche Telecom 8,07%

Vodafone 5,00%

RWE 6,87%

E.ON 6,48%

Source: Financial Times

For more high dividend investment ideas take a look at Europe’s highest dividend yields 2010 ? Update

German utility companies (RWE & E.ON) are especially attractive at the moment as uncertainty over a nuclear fuel element tax implemented after the government agreed to extend of the life of certain nuclear power stations led to share price declines.

In fact both companies are trading close to their 52 week lows not much above the lows reached in March 2009.

Also with electric cars appearing utilities may even become a growth industry….

In 2011 we will most likely be looking at sideways markets due to the sluggish recovery of mainly the US economy.

But even sideways markets can result in quite substantial movements so be prepared to make use of undervalued opportunities.

Be open for unexpected developments.

For example all the turmoil in Europe and the resulting weak Euro is causing a boom in export focused Germany. So be open to new information.



A word of warning.

Be very careful of bonds and bond funds. Holding bonds in this environment where interest rates nearly cannot go lower is a dangerous business.

Also avoid looking for higher interest rates in structured products, long maturities or lower quality bonds. They will all be a disaster area for investors over the next few years when interest rates move up.

If you are looking for income look at the high dividend yield companies mentioned above.

Gold is a bubble.

Thus watch out for corrections this year. I am writing a longer article on gold which I should post next week.

Gold has had a hell of a run and to my mind is only a hedge if civilisation returns to the Stone Age, something I think is highly unlikely.

As far as currencies go I like the Euro.

There has been no printing of Euro’s and the limited amounts of bonds purchased by the European Central Bank is nothing to get worried about. At least not compared to what is going on in the UK and USA.

However be sure you keep your Euros in short term highest quality bonds, for example German Government bonds or a highly rated bank.

That’s it for me as far as gazing into the future goes.

In terms of my portfolio.

I am doing what I always do.

Look for undervalued companies and invest. As companies become more fully valued I am selling out and recycling the funds into something undervalued again.

This is something you will have to do more often if we have a sideways market as I mentioned above.

By the way.

I recently read an excellent book on sideways markets by my friend Vitaliy Katsenelson called The Little Book of Sideways Markets. I am busy with a review and will send it out as soon as I am done.

Wishing you a prosperous 2011

Tim du Toit