The Year in Review

The year of 2010 was quite eventful to many investors. The market was pretty good until the late spring. Then the flash crash gave many investors heart attack. The European sovereign debt crisis nerved many investors and will continue to do so in 2011. In fact, the PIIGS nations (Portugal, Italy, Ireland, Greece and Spain) have even more debts to refinance in 2011 than 2010.

In the midst of high volatility in the market, there were some good opportunities. Shares of many companies bottomed in the summer of 2010 and have made huge runs since then. Many copper, metallurgical coal and silver stocks have given high double digit (if not two or three fold) returns to investors.

Draught and floods in many parts of the world have driven the food prices higher. The prices of wheat, cotton, coffee beans etc.. have risen dramatically. This, coupled with BHP’s failed hostile bid to buy Potash Corp, has made Canadian fertilizer companies such as Potash Corp of Saskatchewan and Agrium very attractive to investors.

Many countries woke up to the fact that rare earth metals are really rare. In response to the diplomatic friction between Japan and China (surrounding a Chinese fisherman detained in Japan for illegal fishing), China slowed its export of rare earth metals to Japan.  Few months later, China has announced that it will cut its export quotas to the rest of the world. Rare earth metals will continue to be key ingredients in batteries, military use and green technology.. We’ve seen shares of North American rare earth related companies jump as well.

Geopolitical Tensions

In addition to the middle east surrounding oil.. the tension between the two Koreas as well as China and the U.S. added to the world’s geopolitical tension. The Eastern Asian region is becoming even more militarized with Russia, Japan and China’s plans to spend more money in their military buildup.

Currency War

Central banks around the world engaged in quantitative easing to keep liquidity in the market. This inevitably resulted in currency volatility and race to keep their exports competitive. China and the U.S. exchanged rhetoric surrounding the value of Yuan relative to the U.S. dollar. Many countries were unhappy with the Berneke's decision to initiate another round of qunatitative easing (QE2). Germany learned a hard lesson from its historical experience about monetization of debts and it remains to be seen how monetization not just in the U.S. but many parts of the world will end.

2011?
As I mentioned earlier, European sovereign debt crisis will continue to be an issue. But it's already well known risk to the market participants.

U.S. munis (municipal bonds) can possibly pose a serious problem to the market as well in 2011. Illinois, California, New Jersey and many other states have deficit and debt problems to deal with.

Will Chinese real estate market and bad loans made to the sector come back haunt the economy in 2011? It remains to be seen.