Reasons To Be Cheerful

09.12.10

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If the start of the festive season is not enough to put a smile on your face, perhaps these encouraging predictions for equity markets in 2011 will do the trick? The head of equities at Schroders

If the start of the festive season is not enough to put a smile on your face, perhaps these encouraging predictions for equity markets in 2011 will do the trick? The head of equities at Schroders reckons UK shares can rise 20-25% next year. The North America fund manager at Cavendish Asset Managers says US equities could gain 20%. Goldman Sachs? Jim O?Neill believes we have entered a ?global bull market?.

2010 hasn?t been the easiest year for equities. At the time of writing the FTSE 100 is up around 4.5% over the 11 months from 4th January to 3rd December, and the S&P 500 around 6.5%, but it hasn?t been a straight ride. Investors may have hoped for higher returns on their Christmas wish lists last year, and with much less volatility along the way, but considering the uncertainty markets have had to deal with we don?t have much cause to complain about the end result.

Markets have had to contend with the Eurozone debt crisis, the BP oil spill, double dip speculation, unemployment, consumers saving rather than spending, geopolitics etc. Taking all this into account you may have expected markets to fall over the year, but unless something drastic happens over the next few weeks, they should close higher than they started.

While the risks were genuine (though not as bad as initially expected) and some have not completely gone away, there are plenty of positive factors around too, which have helped balance the volatility and bode well for 2011.

Economies are growing, even if it is slowly. In the US gross domestic product (GDP) has grown for five quarters in a row. In the UK the Office for Budget Responsibility now forecasts growth of 2.1% for 2011. Overall, last March, European GDP was expected to grow 1.7% in 2010, which, in spite of debt crisis, is around the average growth rate since 1996.

Emerging markets led the world out of recession and look set for continued growth. Their growing middle class is a valuable and growing market for western exports, so developed economies also benefit. The infrastructure going on as nations develop also helps drive demand for commodities, machinery, technology and investment.

Manufacturing is expanding across the globe. In the US it has expanded for 16 consecutive months and companies have increased payrolls by 93,000, the most in three years. Contrary to expectations, the UK manufacturing index achieved its highest level in 16 years. Employment in the sector also grew at the fastest rate since the data began being recorded in 1992. In Europe activity increased to a four year high, led by Germany and France, and the region?s manufacturing index has indicated expansion for the last 14 months. Emerging markets have had strong gains across the board, with India leading the world with the highest growth rates.

This is indicative of strong economic fundamentals and signals current and future demand.

Corporate earnings are another important signal of economic health. In the US company earnings beat expectations the last four months. UK corporate profits are expected to be up around 50% this year.

While companies were watching their pennies during the downturn, their cash stockpiles grew ? it is estimated that US companies have $2 trillion on their balance sheets – and they will start to put this money to good use. Since they?ve been successful at cutting costs, as sales improve their profit margins are higher. Profitable companies can consider expansion, undertaking additional investment and upgrading equipment. Merger & acquisition activity is also increasing.

While share prices are often affected by sentiment, as discussed above there are strong fundamentals backing them.

As a result, Richard Buxton, head of equities at Schroders, has said that they expect UK equities to rise as much as 20-25% in 2011.

He explained that the recession has actually made the UK one of the most attractive areas for investors today. In the absence of a double dip, companies will become more optimistic. This will feed through to capital expenditure – and they have cash waiting on the sidelines to employ. Planned projects could be implemented and the pick up in merger and acquisition could increase. All this gives UK equities the potential to rally significantly next year.

UK stocks remain relatively undervalued and offer strong return potential, he says. Dividend yields are growing and listed companies have a global reach.

Looking at US shares, Tim Roberts, North America fund manager, Cavendish Asset Management, believes that in spite of the remaining risks for global recovery, ?it would not be unreasonable to expect the S&P 500 to gain a respectable 20% in 2011?. He explains that as the prospect of a double dip has been partly priced into share prices, so provided a dip back into recession is indeed avoided, shares are looking good value for money.

There are still risks to be navigated as we move through 2011, but overall there are many positives around to support and improve share prices.

As always though, it is important to have adequate asset allocation (i.e. other assets besides equities) and diversification across countries, sectors, company size etc. Any investment decisions should also be based on your specific investment objectives, personal circumstances and your risk tolerance and you should normally plan to hold shares for the medium to longer term. Speak to an established wealth manager like Blevins Franks for advice on suitable investment strategies for you.

By Bill Blevins, Managing Director, Blevins Franks

6th December 2010

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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