The answer to this question may not be easy. Especially in the current uncertain environment. In fact, there could just be multiple answers. Each depending on whose prediction you rely upon. If it is someone like Marc Faber or Barton Biggs, then surely, the IT stocks are likely to emerge as the top performers. The reason being these two gentlemen think that the US dollar could be headed for a rally in 2010. And if that is indeed the case, then the Indian IT companies could easily add a few percentage points to their profitability as most of their revenues are billed in dollars.
Furthermore, Biggs also believes that the US economy could witness a burst of growth in 2010 and 2011. This is likely to be an even bigger booster for the fortunes of Indian IT companies as it would lead to a jump in outsourcing contracts. Thus, if you have faith in the prediction of these two gentlemen IT may be the place to be. But of course, if the predictions do not turn out to be true, then you would be left holding stocks where most of the bigger players look fairly valued from a medium term perspective. In other words, a significant dent to your overall returns.
Now, if you are a follower of the likes of Krugman and Grantham, another set of people at the top of their respective fields, you may want to invest in companies that are heavy users of commodities like say auto companies or power equipment manufacturers. This is because these people feel that the US economy and its stock markets may fall in 2010, thus suppressing worldwide demand for commodities and hence, their prices as well.
We have just highlighted the difficulty that arises when one tries to make an investment from a short-term perspective and in sectors that may have no competitive advantage to speak of. Now, let us shift our focus from the ideal investment in 2010 to an ideal investment from a 3-5 year perspective and think only of companies with strong competitive advantages say like a Nestle or Hero Honda.
When investing in these proven performers from a long-term perspective, one needs to look at nothing else but their valuations. If they make sense from a 5-year perspective, then questions whether to follow Faber or Grantham need not enter one's mind at all.
Please bear in mind that we do not intend to belittle people like Faber and Grantham. We respect them for what they are. But forecasting the big picture and that too from a short term perspective is a tricky thing and success is not guaranteed here. What matters is taking a longer-term view of things and investing in companies that have performed across all timelines, inflationary as well as non-inflationary. Unless there are extreme events such as war on the streets, these companies are likely to keep continuing their good work and increase shareholder value.
Thus, if one constructs a portfolio of 10-12 stocks comprising of such stocks with all of them bought at reasonable valuations, we are sure that one is likely to come out reasonably wealthy the other side of the five-year period.