Derek Pain: Next year will be tough, but not as bad as some expect

No Pain, No Gain

Predicting stock market behaviour is a hazardous exercise. Many City pundits now eschew the once obligatory activity of greeting the new year with their thoughts on the months ahead and a forecast of how the year will end.

But I am a traditionalist. Mind you, my forecasting record is not particularly good. I did enjoy a heady couple of excursions with quite near estimates of where the Footsie would end the year, but any satisfaction I enjoyed came to an abrupt halt with my prediction for the 12 months just ending. I suggested that the benchmark index would end at around 6,300 points. How wrong can you be?

What about next year? Well, we all know it's going to be tough for countries, companies and most, but not all, individuals.

Although it is expected to fall, inflation could remain high and dole queues stretch even longer. The squeeze on consumer spending will tighten. And the problems of the euro – and the eurozone – show little, if any, sign of abating. Although the failure of what is after all a politically inspired currency would eventually be beneficial, the shorter-term ramifications could be considerable. But I do not believe its demise would have the hugely damaging impact on this country that euro devotees like to predict.

After the banking crisis of the past few years, it is now the fall-out from the eurozone that casts the greater shadow over the coming months. The two upheavals are closely related, even intertwined, and many banks remain under pressure. Alleged experts believe Britain, and the rest of the world, will remain in deep despair for quite a time. They are already talking not of a dismal few years but of a lost decade.

I have experienced quite a few economic disasters. I was a mere kid in the Thirties but have since witnessed from a City viewpoint the oil-inspired retreat of the Seventies, Black Monday in 1987, the Exchange Rate Mechanism confrontation and the hedge fund upheaval of the Nineties, as well as the crashes in this century.

Maybe this is the worst crisis since the Thirties but the world has a refreshing habit of proving the deeply pessimistic wrong. They could again be wide of the mark. The stock market has a rewarding inclination to anticipate trends. Perhaps this year will be nowhere near as gloomy as many expect. Shares, already relatively cheap and, in some cases, offering dividend yields that put banks and building societies to shame, could astonish us all.

Long-term investors, such as the no pain, no gain portfolio, should stick with their shares and, if possible, buy.

The portfolio is looking for another member and is thinking of alighting on Stagecoach, the bus and train group. Like every company in the land it faces problems, but should ride out any storms the economic climate throw at it.

With a £1.5bn capitalisation, the group should add a little ballast. If I do recruit the shares it will be something of a reunion, for the portfolio scored handsomely from an earlier Stagecoach involvement. Indeed, I reluctantly sold them because of the company's then habit of buying in shares to return cash to investors. Such actions transgressed my rule of each investment being £5,000.

The shares are, as I write, priced at around 10 times expected earnings. The interim dividend was increased and I expect that the final one will also be lifted.

Investors will, I believe, become increasingly focused on dividend payments in the months ahead, particularly if high-street saving rates remain so depressed. Among the stock market's high-yielding stocks are such revered names as Legal & General, J Sainsbury and Vodafone. Unfortunately, relatively safe, high-yielding shares among small caps are few and far between. Hence the reluctance of many investors to stick with the stock market undercard.

Well, what about my Footsie forecast for 2012? I have not forgotten. Ever the optimist, I believe the gloom has been laid on too thickly. Shares will remain volatile, but I expect them to put up a better show than many are predicting. Indeed, I would not be surprised if the blue-blooded index, now fully owned by the Stock Exchange, manages to end the year not far from 6,000 points.