Experts divided over stock market prospects

Click to follow

The FTSE 100 Index is on course to end 2009 on a high note, but all eyes are now on the year ahead as 2010 promises to be a crucial year for the UK, both economically and politically.

Investors are questioning if this year's remarkable stock market recovery can be sustained in 2010.

London's blue-chip share index has soared by nearly 60% since slumping to a six-year low in March of just over 3500.

On Christmas Eve, it closed above the 5400 barrier for the first time since the demise of Lehman Brothers last September 15.

And an ongoing festive rally has now returned the FTSE 100 to the level prior to that fateful day, helping stocks finally recover losses suffered in the wake of the investment bank's collapse.

However, the most recent rises have been based on little in the way of tangible fundamentals and experts are split on the market's outlook for 2010.

Jeremy Smith, head of UK equities and fund manager at Neptune Investment Management, cautioned investors to be wary of placing too much emphasis on the current rises.

He said: "The rally has been increasingly narrow, driven by the weak dollar again pushing up commodity prices and some sector rotation into larger capitalisation companies.

"Overall, risk appetite has been waning, volumes have been low and interest in equities has dissipated, as worries have resurfaced over rising levels of unemployment and when growth will begin to turn positive."

The year ahead will be dominated by the prospects for the economy both in the UK and globally, while the UK has the added headache of a general election and a ballooning public deficit.

There are increasing concerns over the election, with recent polls pointing to the possibility of a hung parliament, where no party would have absolute power.

This would be a poor scenario for stocks, creating uncertainty for the country at its most vulnerable time and presenting the risk of split opinions over action to tackle public sector net debt.

The Share Centre believes these factors will act as a drag on the Footsie's progress. It is predicting the FTSE 100 will end 2010 roughly where it started, at 5450.

Unemployment, consumer spending, the path of the UK property market and the Bank of England's planned withdrawal of its quantitative easing scheme to boost money supply will all have a bearing on economic recovery and therefore stocks.

But the UK economy and its domestic issues are only one side of the coin. Global economic prospects are increasingly having a bearing on UK shares, with higher levels of profits for UK firms with overseas operations.

While the UK has been one of the last countries to emerge from recession, the return to health of many other economies will provide a much-needed boost.

Peter Cockburn, head of UK equities at Scottish Widows Investment Partnership (SWIP), said: "While the UK economy may still be struggling, the direction of UK-listed share prices is influenced more by global economic growth than domestic growth as the FTSE 100 generates close to 70% of its combined profits from overseas.

"Equity valuations remain very attractive both in absolute terms and relative to other asset classes. Resources, pharmaceuticals and utilities are three sectors that currently offer outstanding value and, in the short term at least, equity markets look set to continue climbing the wall of worry."

China's economic prominence and power will really begin to take hold in 2010, which will become a driving force for global equities, according to Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers.

He also believes that with interest rates expected to remain low for some time in both the UK and US, this will be to the advantage of equities as savers look elsewhere for returns.

Mr Hunter is pencilling in a 6000 close for the FTSE 100 in 2010 - a level not seen since June of last year.

Barclays Wealth is also cautiously optimistic for the Footsie over the year ahead, forecasting a 5700 close for the top tier.

Kevin Gardiner, head of investment strategy for the Europe, Middle East and Asia region, said: "We expect equities again to be the strongest investment asset class in 2010, though with a general election and fiscal retrenchment ahead, the gains in prospect seem likely to be more muted than those seen in 2009."

The London Stock Exchange also points to a busier year for new entrants on to the market. It said there was a 16% rise in new and further equity issues in 2009 compared with 2008.

With only 18 initial public offerings against 73 in 2008, most of the £80.7 billion raised was through shareholder cash-calls as companies used rights issues to shore up battered balance sheets.

But the LSE believes 2010 could be a "promising" year for new listings, judging by the pipeline of new companies looking to float.

However, Gavin Oldham, chief executive of The Share Centre, warned the market will end up fighting a "tug-of-war" in 2010, torn between the bearish domestic outlook and the bullish international one, he said.

Larger companies in the FTSE 100 may be cheered by global opportunities as worldwide gross domestic product forecasts are for around 4% growth, yet smaller domestic stocks could be less fortunate.

He added: "It's worth remembering that the momentum behind equities in 2009 has been caused by very low interest rates and quantitative easing, not by rising earnings.

"2010 will see a substantial increase in public sector unemployment, a significant fall in the standard of living and more local business failures. It will be a year to remember for its politics, not for economic performance."