24th December 2010
As December draws to a close investors invariably start to look ahead at what they can expect in the New Year. There is never any shortage of expert views as to what is going to happen, but how safe is it to actually rely on their forecasts? To find out we must first head back to this time last year.
The FTSE 100 finished 2009 at 5413 after rallying sharply from its March low when it briefly dipped below 3600. Gold also had a good year, but was off its high at $1,105 per ounce, while oil had almost doubled to $79 a barrel.
Coming into 2010 many of the experts were concerned about whether this remarkable rally in risk assets could be sustained. Amongst the more pessimistic was Charles Stanley, which was one of several firms questioned by The Times back in November 2009.
Charles Stanley actually forecast that there was a 50% chance that the FTSE would finish 2010 13% lower at 4700. They did however point out that if the ‘sweet spot conditions' lasted longer than they expected then there was a 25% probability it could finish at 6000 or above.
Of all those questioned by The Times the firm that came closest to getting it right was Killik & Co. They predicted that the FTSE would finish 2010 at 5850 and look like being almost spot on.
For some of the more outrageous predictions you need look no further than Saxo Bank, whose forecasts are reported on FT Alphaville . This time last year they thought that gold would fall to $870 an ounce, the dollar would strengthen to 110 Yen and the price of sugar would drop by a third to 18 cents a pound.
As it turned out, 2010 was another volatile year for the markets. Shares started well but suffered during the second quarter as the Greek sovereign debt issues dominated the headlines. Prices then rallied before it was Ireland's turn to unsettle the nerves, although the bailout has at least temporarily restored a sense of order.
At time of writing the FTSE looks like finishing 2010 at around 5900, a healthy increase for the year of about 9%. Killik got it almost spot on and while Charles Stanley were way off with their bearish case of 4700, the bullish alternative of 6000 wasn't too far wrong, although they certainly hedged their bets.
The debasement of currencies through quantitative easing (QE) has meant it's been another strong year for gold with an end of year valuation close to $1,400 looking likely.
Saxo certainly got it wrong on that one and they were also caught out by dollar-yen, which actually fell to 84. The one forecast they got right was sugar, which fell by almost a half before rallying to end the year higher.
The main lesson from all this is that even the experts get it wrong more often than not, hence don't be surprised if their views end up wide of the mark.
Killik & Co got the closest last year so their forecasts warrant more attention than most. They think that the FTSE will finish 2011 at 6600, which would amount to a gain of around 12%. The firm also believes that the pound will strengthen on the foreign exchanges.
Killik was one of 12 firms questioned by the London Evening Standard , with the consensus view being that the FTSE will enjoy a strong rally in 2011.
Charles Stanley was one of the more bearish to take part, as indeed they were last year. Their base case scenario is that the FTSE will experience a modest rise to finish 2011 at 6150. They also think there is a 25% chance that it might prosper and close at 6700, with the same probability that it could fall as low as 5000.
Saxo's more outrageous predictions have been shown to be somewhat less reliable, but they can help to highlight some of the more extreme scenarios that investors need to guard against.
This year FT Alphaville reports them as saying that gold will shoot up to $1,800 an ounce as the currency wars continue and that the extra liquidity from QE2 will enable the S&P 500 to reach an all time high of 1600.
Richard Buxton, head of UK equities at Schroders, expects the FTSE to gain 20% in 2011. Speaking to Citywire back in September he said part of the reason was that UK and US corporates were already pricing in a harsh double dip recession.
He and his colleagues share their views of how the different regions and asset classes will perform in 2011 in Talking Point .
James Henderson, manager of the Henderson UK Equity Income Fund, says that the global industrial economy is steaming ahead despite the recurrent worries over banking systems and sovereign debt crises.
In the firm's Outlook for 2011 he points out that manufacturing companies, particularly in the UK, have increased their sales and profitability. "I believe this theme is set to continue in 2011 with industrial stocks poised to deliver robust share price appreciation once again."
Philip Poole, global head of macro and investment strategy at HSBC, believes that the key driver for risk assets in 2011 will be whether the wall of liquidity from QE2 will win out over the risk that the global recovery runs out of steam.
He says that on balance, the combination of low to moderate developed market growth, strong growth in emerging markets and flush global liquidity should prove positive for risk assets.
"The destinations of choice for investors searching for return should continue to be emerging market financial and r
eal assets and select commodity currencies and assets in the developed markets."
What are your predictions for 2011?