Outlook It may be the festive spirit, or the optimism with which many people look forward to the fresh start of a new year, but the final few weeks of December are very often marked by a decent run for the stock market. So it is proving in 2010: on Christmas Eve, the FTSE 100 Index closed back above the 6,000 mark for the first time in 30 months, and the market is holding on to the gains of the year.
Will 2011 be the year in which the stock market breaks through the highs achieved, rather neatly, on the final day of 1999, when the Footsie closed at 6930? Possibly, though we have been here before: in 2007, share prices seemed poised to post a new high-water mark, with the FTSE 100 rising above 6,600, only for the creditcrisis to intervene.
The markets' strength seems remarkably out of kilter with the economic theme of the day, austerity. For Western economies, 2010 has been a tough year, and there is little prospect of 2011 being any easier. So how have share prices managed to rise above the mire?
The answer lies in the responses we have seen to this economic environment, many of which have been conducive to corporate performance (as, of course, they were intended to be).
Above all, monetary policy remains looser than anyone would have believed possible prior to the credit crunch. For all the talk of the split on the Bank of England's Monetary Policy Committee over when to begin raising interest rates, Andrew Sentance, the most hawkish member, simply proposes a 0.25 percentage-point hike. That would take base rates to 0.5 per cent – lower than at any time in the past 350 years other than the year of 0.25 per cent rates we have just had. And while a second bout of quantitative easing in Britain now looks less likely, the US has just begun its $600bn money-printing exercise, the effects of which will be felt well beyond its shores.
Then there are the efforts of companies themselves to consider. Faced with unprecedented economic headwinds, businesses large and small have hunkered down – reducing headcount, cutting costs and, most importantly of all, paying down debt wherever possible. The result, in many sectors of the economy, has been that companies are now leaner than ever before and many of them are sitting on large cash piles. At worst, that suggests fewer failures to come; at best, a bout of M&A activity that could drive share prices higher.
And there are other reasons to be positive too. Though Chinese growth – and to a lesser extent Indian growth – is being managed, Asia offers some extraordinary opportunities. So, too, does new technology, particularly in the space related to climate change, where much of the work of the past 10 years or so appears now to be coming to fruition.
Even the austerity theme offers some upside. There will be many companies that stand to benefit as the Government seeks to shift responsibilities from public toprivate sector. In Britain, in particular, 2011 will be the year in which that picture becomes clearer.
For bullish investors then, there is a case to be made for another 12 months of gains. To test the all-time high for the Footsie, the blue-chip index would be required to post a return of 15 per cent or so – an acceleration on this year's gain of around 10 per cent. It is not out of the question.Reuse content