KEY POINTS:
United States market commentators are usually quick to publish their predictions for the new year, but this time, they are comparatively quiet - probably because many don't have a clue what the future holds. They have witnessed unprecedented market volatility and these are uncertain times.
Yet, this recession
is fundamentally like any other and what is certain is that economies will recover.
Many commentators are saying we will know we're emerging from the downturn when the housing market picks up. This view is fundamentally flawed.
Now is the time to use a behaviour-based model rather than economics to understand cycles.
The US economy is already showing signs of a turnaround. Locally, our economy is between 12 and 18 months behind the US, so we can expect to see the recovery start here in about another year.
As we start to experience a downturn, households' disposable income begins to shrink and companies' free cash flow reduces. The result is that expenditure on big-ticket items falls.
Leading indicators of a downturn are drops in the sales of houses and new cars.
Households need to ensure that what they have will last longer so they focus on maintenance. As the economy moves into a recession, households spend more on home DIY and spare parts for the car.
People also start growing herbs and vegetables to save on food bills.
Similarly, companies respond to changes in consumer spending patterns.
In the motor industry, many companies have put more money into promotions of maintenance warranties and quality spare parts.
Companies such as Yates, Palmers and other garden shops are booming as vegetable seedlings fly out of the door.
Early recovery signs include an increase in holiday travel, a lift in employment figures in the service industry, a slowing of DIY activity and an increase in the number of small businesses being registered.
Rising house sales come later - house sales are the first to be hit and the last to recover as we go through an economic downturn.
The first thing that the average household does after a period of maintenance during a downturn is to take a break.
People in the US are now starting to do this, with the price of petrol having dropped and huge discounting continuing.
Expedia, one of the big US travel agents, has seen an increase in the number of tickets booked. More people travelled over Thanksgiving this year than they did at the same time last year.
The number of new small businesses being registered has also started to pick up and employment in many sectors of the service industry is on the rise, although the financial sector is still laying off staff.
Housing will recover last, once the US is well and truly out of recession. The same is likely to happen here.
US market sectors likely to perform well next year include engineering and construction.
When the credit freeze thaws, companies that will benefit first are those with long-term contracts assured, namely the refineries, telecommunications companies, airports and aircraft manufacturers.
The engineering and construction companies that service them, such as KHD Humboldt Wedag, ABB and KBR, will be the ultimate beneficiaries in earnings growth.
Technology companies, especially those focused on consumer electronics, are also likely to prosper since most have significant cash on their balance sheets to weather the recession.
The chief executive of Intel recently said the group will spend its way out of the recession and consequently perform relatively well.
Financial stocks are probably best avoided for a while. Interventionist strategies implemented by the US Government were necessary, yet have changed the fundamentals so it is difficult to predict how they will do.
These companies no longer have the clear vision for making profits they used to, making it difficult to see how they will generate organic growth, the cornerstone of a good investment.
* Alan Goldman is the director of Goldman Henry Capital Management.
