Mark Lister: And the top 10 predictions for 2011 are...

Having finally accepted that the holiday season is over, it's a good time to reiterate our market predictions for this year. First, a recap of last year's "10 surprises for 2010".

We scored seven out of 10 last year. We were wrong about currencies, with the kiwi dollar going up 8 per cent when we forecast it would go down, and the Chinese having continued to refuse to raise their currency against the US dollar.

The All Whites did their very best to live up to our faith in them and came close to proving us right in our prediction of a second round Soccer World Cup appearance.

Equity markets deliver a positive, but single-digit, return - right, but only just.

We expected markets to give us at least 7-8 per cent but the NZX50 was up just 2.4 per cent in 2010. And what an awful ride.

The market gained 2.5 per cent in the first part of January, only to fall 7.6 per cent in February, recover 8.5 per cent in March, fall 11.6 per cent over the next three months and then roar back to life with a 13 per cent rally from June to October. November and December saw the market go sideways as the holidays approached.

Interest rates begin to rise - right.

The RBNZ twice increased the OCR during 2010, once in June and once in July, by 0.25 per cent each time to take the interest rate to 3 per cent, where it sits today. The economic recovery has been slower than expected so the RBNZ has delayed any further increases.

The NZD falls and the USD stabilises - wrong.

The NZD rose 8 per cent last year against the USD as investors lamented America's negative real interest rates and cash was redirected to higher-yielding currencies such as the NZD.

Policy changes in NZ tax, regulation and expenditure - right.

With a sense that the Budget might have more grunt than 2009's bland affair, we took the step of attending the Budget lock-up for the first time. We were not disappointed. Tax cuts, changes on rental property tax treatment, and a plan for reducing the Budget deficit and debt.

China revalues the yuan - wrong.

China has said it plans to push through incremental increases of 3-4 per cent a year in its currency versus the USD. Nothing has been seen yet though. But the low USD means a low yuan, which is causing high food inflation in China. This may force the Government's hand.

Energy reignites as a major investment theme - right.

Oil started the year at US$79 and finished over US$90, a rise of more than 15 per cent, and the long-term energy theme continues. Australia announced renewed efforts to move towards renewable energy and China has included similar targets in its upcoming five-year plan.

Corporate activity increases - right.

Cash mountains are burning holes in many company balance sheets and merger and acquisition activity began to heat up. BHP's bid to buy Potash was the most dramatic example of corporates attempting to make use of balance sheet strength.

Asian markets decouple and outperform - right.

Emerging markets are up far more than developed markets although it has to be said that "decoupling" has not occurred. If anything, the world has become more closely correlated and driven by "risk on" or "risk off".

Property prices soften - right.

According to the REINZ, house prices slipped 2.2 per cent last year.

NZ advances to the second round of the Soccer World Cup - wrong, but how close did we come?

Perhaps 2011 will be the year when more investors come to accept that a measured, balanced approach is a more valid approach to investing. It protects against harmful events, while allowing portfolios to share in the upside that comes from positive surprises. Why bet on one of deposits, bonds, property or shares when you can own all of them? With that rather serious introduction, here we go on our guesses for next year, our "10 for 11".

1: In a case of "if you keep saying something long enough, you will eventually be right" we wonder if our high-flying kiwi may weaken.

Some sort of localised event could trigger this (the disease that hit the kiwifruit industry is a reminder of our primary sector's vulnerability) or more likely an increasing prospect of an eventual rise in US interest rates.

2: Europe muddles through. The virtual bankruptcy of Ireland is a dreadful illustration of what can happen if debt-fuelled property bubbles are allowed to inflate beyond any semblance of rationality. The IMF is now in charge of Ireland's finances. While bad, Ireland, Portugal and Greece are not large enough to destabilise Europe, but Spain is. The good news is - Spain has made far better progress in controlling its spending and debt. As long as Spain holds together, which we think it will, we believe Europe will muddle through 2011.

3: We expect shares to finish the year higher than they started. With dividend yields in many cases still 2 per cent or 3 per cent higher than yields on bonds, investors may start to turn to shares for income and for inflation protection. This income advantage that shares are currently offering investors should provide some support, and the ongoing realisation that interest rates are likely to stay well below historical levels should see investors continue to shift their focus to these higher return opportunities.

4: Interest rates start to move up again, but not until the second half of the year. With the recovery only spluttering along, our Reserve Bank may leave interest rates on hold for longer than expected. A lot will depend on the housing market, unemployment and consumer confidence.

5: House prices will again be uninspiring. To borrow one of the Reserve Bank's more politically correct phrases, we believe house prices will be "flat in nominal terms", which is a polite way of saying they will fall after you adjust for inflation. Houses remain expensive relative to rents and to household incomes, and wages aren't catching up. That means house prices will have to do the adjusting.

6: The US Government gets more done in the next two years than they got done in the past two years. This is a "hope" more than a forecast. With a gridlocked Government in place - the Republicans control the House of Representatives while the Democrats control the Senate and White House - there is the potential for policy deadlock. The Fed appears to be doing all the heavy lifting. While we may agree or disagree with Ben Bernanke's approach, the market is at least thankful that he is doing something. There is clearly a perception that the Government is not. Perhaps the growing discontent with Washington will jolt the politicians, Democrats and Republicans, to work together to get things done over 2011.

7: National wins general election. If the 2010 Mana by-election is anything to go by, National may not only win the general election, it may secure a majority and govern without the need for minority party partners.

8: The potential for partial SOE sell-downs brightens the outlook for the local market. A sensitive subject, and political positioning may overshadow economic reasoning in this regard, but for the Government to get serious about KiwiSaver and national savings, the capital markets will need a few more quality listings. Although we would expect the Government to retain majority stakes, the wider community of local investors would happily take partial ownership of some of our SOEs.

9: Merger and acquisition activity continues to build momentum. Companies globally remain fiscally strong, with low levels of debt and an opportunity to use historically low funding costs to grow. With confidence improving and plenty of balance-sheet capacity, we see further merger and acquisition activity, share buybacks and special dividends.

10: The All Blacks win the Rugby World Cup. New Zealand beat Australia in the final. With the benefits to tourism that an event of this size will generate, notable beneficiaries include the likes of SkyCity and Auckland Airport.

* Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.