After the 'square root' shaped storm - what sectors will outperform?

People are saving more and spending less. Put the two together and it's clear that consumer demand will take a long time to recover. This absence of purchasing activity makes me nervous about the mid-term outlook for equities. Based on what is likely to be a tepid 'square root' shaped recovery current valuations and returns look challenging . I still don't like the look of either the banks or retailers.

It is also quite possible that the damage done to bank balance sheets coupled to the financial sector deleveraging that will be required over the next half decade will merge to keep the global economy sauntering along at a moderate pace for some time. I'm also toying with the idea that the severity of this downturn in Euroland and the UK might send consumer behaviour off in a new direction - leading to some unexpected successes and some unexpected failures as society readjusts to a world of tighter capital access. Some business models that worked in an era of easy credit are not coming back any tiime soon that's particularly true in the world of personal finance.

Despite my belief that we are in a bear market rally I've added a bit to our emerging markets allocation by taking money off the table elsewhere. Some PRC stocks and Gazprom look cheap on a mid-term outlook. Forgetting for a moment the patronising moniker, emerging markets are likely to show stronger growth than more mature markets over the next decade. If nothing else the gravitational switch in the centre of power from G7 to G20 is a belated recognition that in an interdependent world India,China and Brazil will enjoy growing economic and political clout. There will be surprises en-route. I'd expect the investment banking industry, hitherto the domain of anglo-saxons of one form or another, to have one of its top three champions owned and run by mid-East institutions within two years. With G7 growth rates slowing , a rational area for investors to seek superior returns is going to be in the Brazil,Indian and Chinese markets and their regional relations. Russia remains attractive as a resource supplier ( ie Gazprom and LUKoil ) but endemic corruption and weak, and highly politicised managements will likely keep it a relative laggard overall.

Older investors are also likely to change their lifestyles. I don't think that the habit of maintaining 70%+ of a 401k in equities will appeal to baby boomers after their recent experience. Faced with bruised 401k's the older investor is going to have to work longer or spend less or both. My betting is that we shall see a profound shift towards a new model based on a feel good 'support' economy. Companies providing innovative approaches to improving lifestyle quality, and more cost effective health care needs are going to do very well - kind of Wikipedia with substance.