Almost twenty years ago, Byron Wien--the recently departed Morgan Stanley chief strategist--launched the company's famous Ten Surprises list. It's a list of unconventional investment ideas, which proved to be useful to investors and professionals. The respected strategist is joining the fast-paced world of hedge-fund land and we salute him by offering our out-of-the-main-stream ideas for the next year--although our list doesn't include ten ideas and is, admittedly, not as bold as his usually were.

The ideas on our list are either out of consensus or we have a stronger (e.g., longer term) conviction than others do. With that said, here we go.

Germany will become 2006's best investment story and lay the foundations for a long-term strong performance. Investors who selectively buy German stocks will be buying exposure to a great turnaround story with a multiyear timeframe.

The German economy--the third largest in the world--is slowly moving in the correct direction by implementing necessary changes. The process is slow and the road will have a lot of twists and turns. But the political elite and the rest of the country seem to understand reform is necessary for Germany to avoid fading into oblivion.

Next year should be a year of decent growth for the German economy, as there are signs of strengthening domestic demand. Export growth during the past couple of years has provided confidence to people, corporate profits have been robust, balance sheets have strengthened and low interest rates are expected to support investment and consumption.

This is a multiyear investment theme long-term investors should consider. The returns could be strong and are worth the risk.

Italy is one of the more negative stories in the world today. In April, the country will have elections and, although no one can predict the outcome, what is important for investors is whether a clear majority will emerge. If it does, the Italian economy is ready to implement changes that will positively surprise. In a case like this, the market will also respond positively. A speculative play, Italy could be 2006's biggest positive surprise.

As written about before (see "Taiwan -- 10 November 2005"), Taiwan remains one of our most controversial ideas for 2006. Our reasons are fairly simple: The Taiwanese market has lagged the rest of Asia, valuations are attractive, as the market trades at one of the lowest earnings multiples ever, and it offers a 4 percent dividend yield. Taiwan’s valuations imply the market, as a whole, has gone ex-growth. Yet earnings growth will surprise on the upside in the next year.

Japan will be one of the best performing markets in 2006, despite its solid 2005 returns and a potential short-term correction due to profit talking or global market conditions.

Although many investors have been catching up with the theme--we first talked about buying Japan in September 2003--the difference is Japan is in the beginning of a new multiyear bull market. We'll follow Japan closely, as it can be one of the biggest investment themes for years to come.

Asian technology companies could surprise on the upside in 2006. Although India- and South Korea-based technology companies did well in 2005, Taiwanese companies--the underperformers--should provide the surprise in 2006.

True, there are many global macroeconomic risks that could go against technology stocks. But if there weren't serious uncertainties surrounding this issue's suggestions, then the headline wouldn't be valid.

US big pharmaceutical companies could also surprise. US big pharma has been ravaged by lawsuits and suffers from industry complacency while Europe-based companies have raced ahead. As a result, it's become fashionable to hate US big pharma companies.

These stocks could do much better than the majority thinks, especially given early indications that management teams are implementing changes. Litigations will remain a problem but should be a short-term one. In the meantime, investors will be picking up good dividends while waiting for the breakout--take a look at Altria Group (NYSE: MO) during the last five years to see what we mean.

Steel companies should be avoided. Consensus has it that Asian demand will keep steel prices up and absorb any amount of production. Based on that, we're probably witnessing one of the biggest capacity buildups in history. This isn't sustainable; expect steel prices to decline further in 2006, especially as China achieves surpluses in steel.

The US dollar resumes its decline. In the beginning of 2005, almost no one liked the dollar’s outlook. As a result, the dollar staged a spending performance everyone expects to continue in 2006. We don't think it will; given our expectations that the US will loose momentum in the second half of 2006, we expect the dollar to loose value, especially against the euro.

Growth is back in style. Although paying down debt has been the mantra during the past five years, balance sheets are strong enough for expansionary moves. After all, one of the main reasons for companies to exist is their commitment to sustainable long-term growth and increase of returns to equity. Our final surprise is companies that decide to spend on growth, without abandoning responsible capital management, will be 2006's winners.

As this is the last Growth Engines for the year, we wish to all of you a healthy and prosperous 2006.

© 2005 Yiannis G. Mostrous
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