Top analysts predict a poor 2010 for the UK
AS THE end of the year approaches, strategists at the big investment banks start publishing their forecasts for 2010. Morgan Stanley analysts were the first off the mark, yesterday releasing a rather bleak set of predictions.
Despite a brighter global outlook, the bank’s UK strategist Graham Secker thinks the domestic economy will experience a “Grim” (growth really is mediocre) 2010 as structural issues dog the recovery and the “Nice” (non-inflationary constant expansion) decade is well and truly over.
Secker forecasts stocks to rise further in the near-term and forecasts earnings growth of 34 per cent in 2010 and 16 per cent in 2011. Nonetheless, he reckons that equity markets have already priced in good profit growth and so expects the FTSE 100 to be at 5,000 at the end of next year, lower than it is now.
Indeed, he even proposes that equities are modestly overvalued and expects the UK stock market to trade on a 2010 price/earnings (p/e) ratio of 13.5 and a dividend yield of 3.7 per cent, which are not too far from the long-run average. Currently, the trailing p/e of MSCI UK is 13.
However, before contracts for difference (CFD) traders liquidate all their positions and sit tight for the next 12 months, Secker still believes that equities look attractive relative to other asset classes and that if you cherry pick, you can still find individual stocks on which to go long.
“The combination of a weak domestic economy and volatile markets suggests to us that the stocks that should do well in 2010 will be those that have high overseas exposure and/or a reliable growth profile and/or a reasonably good dividend yield that is secure and growing,” he notes.
He suggests considering buying: BAE Systems, British American Tobacco, BP, Carnival, Cobham, Diageo, Legal & General, National Grid, PartyGaming and Vedanta.
Investors also need to think about the impact of forthcoming tightening, inflation and mergers and acquisitions (M&A), says Secker. “The most likely catalyst to bring the current sweet spot to an end is the start of a tightening phase as authorities look to remove stimulus in conjunction with an improving growth outlook.”
However, although the base case scenario of 5,000 on the FTSE is seen as most likely – 40 per cent – the probability assigned to the index hitting either 6,500 or 3,600 is 30 per cent in both cases. This similarity in probabilities suggests investors need to remain flexible and pragmatic, says Secker.
Markets are likely to remain nervous and volatility is likely to rise regardless of authorities’ actions. CFD traders looking for some short-term movements may well have plenty to choose from, particularly in the run up to the general election, if the result is perceived to be close.
Morgan Stanley might be rather bearish about the year ahead, but that doesn’t mean all stocks are heading lower. Just make your picks wisely.
CFD PROFILE STANDARD CHARTERED
Commission: 0.1 per cent
Minimum Commission: £7
Margin Requirement: 10 per cent
Trading Hours: 8am – 4.30pm
(information from GFT)
Standard Chartered is a FTSE 100-listed bank that has managed to escape the financial crisis relatively unscathed thanks to its strong Asian exposure and its small Western retail presence.
Although its share price did fall in line with the wider market in October 2008, it traded sideways between November 2008 and March 2009 when most UK?banks were crashing hard.
From March, Standard Chartered saw its share price peak at 1,696p in the middle of last month, as banks led the stock market recovery
However, StanChart’s rise was stopped in its tracks last week as Dubai’s debt fears rattled the world’s stock markets. The bank has – like a number of other British banks – to have significant exposure to Dubai.