This past year, 2010 was the second consecutive year of positive performance in the investment markets. This certainly feels good after we neared financial collapse in 2008. Like always, there are negatives to go with the positives, so investors need to be aware of some of the trends that will most likely influence markets in the year ahead.

China, growing annually at a 10% rate, will slow down and face some problems, but still retain an overall growth rate of 7-8%, still very good.  There is an emerging middle class and the beginnings of a spirit of entrepreneurship that is very positive. 

Commodities like steel, coal and scrap metal will continue to increase in price.  Good for the investor in these commodities, pressure for the companies using them and facing difficulty in passing price increases on to their customers. Growing economies are putting severe pressure on prices and supplies of basic commodities. 

Inflation, which has all but evaporated as a concern, will begin to rear its head once again.   Probably this year will see some evidence of inflationary pressure, but it will be building and likely become a serious issue by 2012. Food and energy prices will increase and exert pressure on consumers. Remember, 70% if our economic growth is represented by consumer spending and increases in food and energy costs could slow down consumer spending. 

Natural Gas will increase in use and cost. Oil prices have been increasing and pressure building on development and greater use of Natural Gas.We will likely see Natural Gas legislation in 2011, stimulating interest and activity.

Developments in Biotech will begin to generate activity in both mergers and acquisitions, and in introduction of new effective Biotech products. Traditional Pharmaceutical companies are facing patent expiration on many blockbuster drugs, and will put greater emphasis on their Biotech investments. 

Homebuilders will face another difficult year. Too much inventory, still too much unemployment, interest costs rising and a trend toward renting will all influence homebuilders, and not in a positive way.

Bonds yields have already increased. The yield on 10 year treasuries is already up by 33%. This will generate losses for those who have moved to bond funds for safety. This is an area to watch closely and could actually cause the "bond bubble" to burst. 

Two markets to watch closely are India and Brazil.  India has a younger and better educated population than China, along with a growing middle class.  Brazil will host the World Cup and the Summer Olympics and will feature its growing and vibrant economy.

Here is a really strong possibility - low tax rates on Capital Gains and Dividends will remain and be extended beyond two years, it is a widely accepted belief that low tax rates are necessary to sustain growth in our economy.

Individual investors are going to see the value of their bond funds decline, and they are likely to move back to equities.  With trillions in bond funds and cash, this will prove to be a real stimulant to the stock market. The single best option for now is to invest in reliable, steady dividend generating stocks at home and abroad. They produce yields higher than savings vehicles and provide opportunities for additional capital gains.

For a list of our dividend favorites, please contact us at anadolna@associatesgroupinc.com