10 Themes for 2011
10 predictions for 2011 published in the January edition of CE Vision. You can see the entire issue here.
1) The unemployment rate will end 2011 close to where it is today
During the muted economic recovery many metrics and measures have significantly underperformed past economic recoveries despite the fact that the significant depth of the 2008–2009 recession should have been followed by a steeper recovery. The rate of unemployment is one of the most noteworthy of these underperforming metrics. While the economy will begin to more fully recover in 2011, the unemployment rate will not.
2) Economic growth in 2011 will be better than in 2010
Expecting economic growth in 2011 to be stronger than it was in 2010 is a nonconsensus call. At the time of this writing, the consensus among economists is for 2010 economic growth to weigh in at 2.7 percent with 2.5 percent growth expected in 2011. 2011 will be a mirror image of 2010. In 2010, the first half was supported by a myriad of stimuli and this in turn supported strong economic growth. As that support waned so did the ability of the economy to forge forward. That weakness will continue into the first half of 2011. As we transition into the second half of 2011, the economy will more fully find its footing.
3) The tablet computing category will be less impactful in 2011 than many think
Don’t get me wrong, I love my tablet—but it isn’t (and it won’t be) everything that everyone says it will be. I have a list of 80+ tablets expected to launch in 2011. If you take a bottom-up approach and sum the 2011 sales volume expected for each of the devices in this category, the total volume quickly overwhelms the overall computer market. We don’t need to look back too far to see that such relationships are unsustainable. By the end of 2009, netbooks represented nearly a quarter of all mobile computers—a huge number. Ultimately this proved unsustainable.
I think many are too quick to paint tablets into a similar corner. Some of the projections I have seen show little regard for supply chain dynamics. It takes time to build demand, fill retail inventory, and ramp production. Technology adoption always follows S-shaped adoption curves, but many of the demand estimates look linear. Most importantly, this category is not one in isolation. It is a single segment of a broader category that bears influence on what happens across the entire computing platform. The tablet segment will be a large category in 2011 and the growth rates will be strong, but the figures I’m seeing are not achievable.
4) Consumers will continue to shy away from credit
As the economy unfolded, consumers moved away from credit and towards cash and debit cards for purchases. This is both a function of supply (i.e. access to credit) and a function of demand (i.e. desire to accept credit). This is not something that will change soon. I expect consumers will continue to shy away from credit in 2011.
5) Other durable goods categories like automobiles will compete strongly for consumer tech dollars in 2011—for the first time in several years
During any recession, individuals cut spending on durable goods categories like major appliances and new vehicles more severely than they do on categories like services or nondurable goods. The logic is simple—when caught in a recession, consumers delay purchases that can most easily be pushed into the future. They forego purchasing new appliances or cars and try to extend the life of the durable goods already in their possession. During this last recession consumers were aggressive at foregoing purchases of some durable goods. Items like furniture and major appliances had enjoyed an extended period of above average growth during the housing boom and individuals in turn held back from making these purchases. Vehicle purchases were hardest hit as consumers pushed major purchases into the future. In all this, consumer tech spending held up well relative to spending on other durable goods categories.
However, as the economy more fully recovers consumer appetite will return for spending on some of these forsaken durable good categories. There will be a need to replace durable goods that have finally run their course. Already spending on major appliances improved in 2010. When spending on these categories improves the potential. to pull dollars away from other durable goods, and most importantly tech devices, is very real. While I don’t think the impact will be an absolute decline in tech spending,
I do think the potential on a relative basis is real. 2011 will be the first year in many where the tech sector will feel competition from other durable goods categories for the consumer dollar.
6) Equity markets will appreciate in 2011
I believe equity markets are well positioned for a significant run in the near-term. At the time of this writing, the consensus estimate for 2011 S&P 500 operating earnings was just under $95 a share—an increase of better than 13 percent over the per share operating earnings for 2010. While the median operating earnings P/E ratio over the last 22 years is roughly 18, the market is currently trading at a P/E ratio just south of 15. Even under a sublime scenario—where the current consensus estimate of $95 per share is too high by 10 percent and there is no multiple expansion—still nets the markets low single digit appreciation in 2011. Under the scenario I foresee, we will witness some multiple expansion, but only part way to the long-run median. Even if the current consensus estimate of $95 per share is too high by 10 percent, the markets still realize double digit appreciation in 2011. This can come through multiple expansion or earnings growth. Greater equity market appreciation could easily be achieved in 2011 if current consensus earnings expectations are realized. The key determinants will materialize as we move into the second half of 2011.
7) The U.S. dollar will trade up against the Chinese renminbi
A year ago the renminbi-dollar exchange rate was 6.83RMB to the dollar and it now stands at about 6.6RMB to the dollar—an appreciation of about three percent over the last twelve months. The current consensus expects the renminbi to appreciate another three percent against the dollar with the exchange rate falling to 6.4 by the end of 2011. I believe we will see significant appreciation of the renminbi in 2011.
While consensus expects the renminbi to appreciate three percent against the dollar, I expect to see at least twice that rate. I believe the exchange rate by year end could be 6.2RMB to the dollar or even lower. It’s important to recognize that the renminbi doesn’t float and therefore doesn’t trade openly as many other currencies do. A bet on an appreciating renminbi is a bet on Chinese policy explicitly and U.S.-Chinese relations implicitly. But there are a variety of factors—both internal and external to China—that will compel the Chinese to move the exchange rate a bit faster than expected by the end of 2011.
8) The bond market bubble will deflate, but not in 2011
Bubbles are bubbles until they aren’t. On a number of factors, the bond market feels like a bubble. This bubble will deflate as rates move higher, but it won’t happen in a significant way in 2011. Expectations are calling for less inflation in 2011, not more, and without rising inflation there is less catalyst for yields to move and bond prices to fall. But there are a plethora of issues and factors that will slowly begin to impact the yields investors are demanding and that will begin to knock the froth off the bond market.
9) Black Friday will be less relevant (and more relevant) in 2011
Black Friday, the shopping day to end all shopping days, continues to grow by almost all metrics. It impacts more categories (both within and outside of tech), more retailers participate and offerings are coming earlier. During the recession, store traffic thinned across retailers and few offered early Black Friday deals. This year Black Friday became an adjective for sales promotions with many retailers offering pre-black Friday sales and many retailers promoted sales as Black Friday in October.
They are matching Black Friday deals both before and after the actual day, making door busters less meaningful with many deals available online weeks before the actual day. This will have a dilutive effect on Black Friday. The incentive to shop on Black Friday is minimized as the event expands. So while the broad event might have more impact, as a singular shopping day it will become less meaningful. At the same time, the influence of Black Friday on sales outside of the U.S. is just beginning.
Black Friday is a U.S.-centric event following the Thanksgiving holiday. However, the term “Black Friday” has become synonymous with deals, discounts, and bargains and because of that, it continues to grow in significance and popularity within search engines outside of the U.S. More, it is a U.S. approach to actually offer sales before the holidays. Most countries only offer sales after the holidays to clear out the inventory of items that didn’t sell. The global downturn has influenced this perspective so while Black Friday as a single day has perhaps plateaued in the U.S., its influence has a long way to go in the rest of the world.
10) The audio category will experience a resurrection in 2011
Despite the strength of numerous consumer tech categories, except for a few select segments, the audio category has had a string of vicious years. Transformations within portable media and home entertainment have left their mark on the traditional audio category. But I believe timing is such that these same trends could have a more positive impact on the audio segment. As I write this, I have four devices in front of me that can access audio, but not a single one of these devices is connected to meaningful speakers. I believe the introduction of features like Apple’s Airplay and the “applification” of devices where consumers can access, control and interact with a variety of devices from a portable device like a smart phone or tablet will influence the demand for speakers or systems that can take advantage of these smart features.