Will the stock market flop or climb in 2010?

Will last year's share rally continue? If not, where should investors turn now, asks Simon Read
Click to follow

Investors buffeted by fluctuating fortunes in 2009 could be forgiven for now approaching stock markets warily. But 2010 could prove to be the year that some certainty returns to the arena with the FTSE 100 predicted to climb by as much as a fifth, according to a Reuters poll. Meanwhile, three-fifths of fund managers in an Association of Investment Companies survey expect the FTSE 100 to end the year somewhere between 5,500 to 6,000.

The fund managers tip that emerging markets will be the top performers in 2010 while resources will be the best-performing funds sector. Around a quarter also predict that gold will be the top-performing asset of the year. But where should you stash your cash to get the greatest profits? No one knows for sure, of course, but we persuaded analysts and experts to peer into their crystal balls to predict what may happen in the world of investment over the next 12 months.

Stock-pickers will be winners

"I think that the FTSE 100 will rise by around 13.2 per cent to 5,930 by the end of the year. This however, will disguise a much wider range of outcomes for funds investing in the UK," says fund manager Robin Geffen, managing director of Neptune Investment Management. "Investors will need to not just get the sector right, but the stocks, too, in order to be able to outperform."

He says there is likely to be quite wide disparities even between stocks in the same sector and some sub-sectors. "For instance, tobacco stocks are likely to outperform in the consumer staples sector while brewers, in the same sector, are more likely to underperform. The year will therefore be a year for stock-pickers, providing they understand the macroeconomic picture, both for the UK and globally, which will enable them to be in the right sectors and subsectors."

Geffen says is it important for investors to distinguish between the UK equity market and the UK economy. "Many of the largest stocks in the UK stock market have little to do with the UK economy," he points out. "The UK economy faces some serious economic challenges in 2010 because of the gaping fiscal deficit and a credible plan from the Government to consolidate its finances is urgently required.

"Our current substantial deficit has to be addressed at a time when we also face slower structural growth. The danger at this time is that investors will sell UK government bonds, causing their yields to rise materially. This would also threaten any recovery in the housing market in the UK.

"Quantitative easing resulted in the Treasury going into the red to the tune of 12 per cent in 2009. Meanwhile, the Bank of England purchased government bonds worth 12 per cent of GDP. This is a trick that cannot be repeated in 2010." In other words, Geffen predicts that the UK stockmarket will rise modestly in 2010 while the UK economy faces fresh challenges.

Strong companies will grow stronger

Stockbrokers Killik & Co say the FTSE 100 could reach 5,850 by the end of 2010. "Overall, many of the factors that drove equity markets higher in 2009 remain in place – loose monetary policy, low yields on cash and government bonds, attractive valuations and cash on the sidelines waiting to be invested. Against this background, I believe UK equities will continue to move higher in 2010," says Mick Gilligan, head of research at Killik.

However, he says 2010 will be another year of uncertainty. "There will be little visibility over a number of issues such as the outcome of the general election, the timing of an increase in interest rates and the direction of the dollar. As a result, I will be looking to invest across a broad range of sectors."

He predicts that companies that are able to grow their sales against the backdrop of subdued economic growth should reward investors. "In particular, I would highlight technology and emerging markets as areas likely to experience superior growth. Funds that have good exposure to higher earnings growth include Polar Capital Technology Investment Trust, Axa Framlington UK Select Opportunities and Lazard Emerging Markets."

Gilligan also believes that strong companies – such as Pearson, Man Group and Barclays – are worth a look. "They could take market share from rivals that have either gone out of business or are too financially stretched to take advantage of attractive growth opportunities," he says. "The funds I believe have a greater-than-average exposure to well-capitalised businesses that are positioned to take market share include M&G Global Basics, Findlay Park American Smaller Companies and First State Asia Pacific Leaders."

Emerging markets will offer opportunities

The UK and US will be forced to concentrate on dealing with its debt in 2010, leaving emerging economies better placed to experience growth, says Bruce Stout, manager of Murray International Trust. "In terms of economics for 2010, we've had a period where we were close to the edge in terms of financial meltdown. We've come back from the edge and markets have celebrated that.

"Next year there will be more focus on how we're going to pay for that because huge deficits have been run up. Governments and individuals will have to start to pay down their debt, so the main economic scene will be a return to saving and a contraction in overall debt. For those countries that have plenty of savings, particularly across Asia and Latin America, we continue to see good growth next year and that will be reflected in company earnings and dividends."

Stout says the equity rally that dominated 2009 will not be repeated this year. "There can be no doubt that a lot of the relief rally that happened last year means that it will be more difficult for markets such as the US and the UK to make progress this year. But again in the emerging world, valuations are not stretched and companies have genuine tangible earnings and dividend growth. So we still think there will be opportunities to add value and there will be opportunities to make positive returns from a diversified global equity portfolio."

The global rally will continue

Alan Brown, chief investment officer at Schroders, predicts that the current global rally is likely to continue in 2010 with emerging markets leading the economic recovery, while the sweet spots of low interest rates and rising profits should continue to drive assets through 2010. However, there are a number of potential monetary and economic factors that could de-rail the recovery, he warns.

"There are a number of headwinds that could slow the recovery. They include weak bank lending, quick exit strategies from quantitative easing, the risk of inflation, particularly in emerging markets, as well as a double-dip in the economy if the boost from cost-cutting fades and the pressure from the credit crunch continues. On the other hand, there is a risk of bubbles forming in emerging markets where there is a mismatch between the gathering pace of economic activity and monetary policy. This, in turn, is tied to the US through the dollar," says Brown.

He predicts global growth will be 2.7 per cent in 2010 and says that corporates will be important to maintain this recovery as corporate profits are likely to outpace GDP as a result of improved profit margins. "Equally, inflation pressures are expected to remain subdued and emerging economies, which now account for more than half global growth, will continue to drive the global recovery," he says. Brown reports that Schroders is currently heavily invested in equities, credit and gold and significantly underweight in cash.

The election will impact investments

Gavin Oldham, chief executive officer of the Share Centre, is less bullish about the market, predicting that the FTSE 100 will end the year at 5,450, fairly close to where it is now.

"2010 will be the year when the United Kingdom parts company with other developed countries. It will be the year when all that overspending comes home to roost. The markets that will feel it most will be the fixed-interest sterling bond markets, and particularly government stocks. But it is inevitable that some of the woe will rub off on the stock market: hence my forecast," he explains.

Oldham predicts that the looming election will have a major impact on investments. "The real spectre at the feast is the chance of a hung parliament: to quote Conservative MP Mark Field: "The prospect of a hung parliament risks tipping sterling and gilt markets into a catastrophic state."

No doubt the basis for this statement is that a hung parliament will not be able to find the necessary political will and discipline to tackle the enormous public sector deficit. In this situation, the economic destiny of the country will be driven by the rating agencies.

The $64,000 question is how this could impact on shares, says Oldham. "To a large extent, equities are shielded from the domestic economy by the scale of overseas earnings: for FTSE 100 firms, 70 per cent of profits are earned overseas. Even if day-to-day interest rates remain very low, thus increasing the attraction of income yielding stocks, equity dividend yields of 3.5 per cent do not sit easily alongside gilt yields of 6 per cent or more.

"It is, however, likely that the pound will take still more of the weight, thus giving exporters more opportunities. However retailers and those with a more domestic franchise will suffer," says Oldham.