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Where will the markets end in 2013?

A round-up of the views on where the FTSE will be at the end of 2013
December 21, 2012

The FTSE had a bumpy ride in 2012 as European leaders played budgetary 'chicken' on an epic scale, the electorate in the US flirted with a lurch to the right before falling once more for Obama's oratory charms, and the Chinese dragon coughed and spluttered before rumbling on, just a little slower than before; oh and London had a sports day and did rather well in the genteel world of velocipede racing.

We had the strongest start for the FTSE since 1989 and the index of 100 leading shares had risen some 7 per cent to 5970 by mid March. The old adage that 'as goes January, so goes the rest of the year' looked as though it was going to hold. Then eurozone reality kicked in and bond yields soared in Italy and Spain, the FTSE plunged 10 per cent reaching lows of 5230 by mid May.

Then something rather strange happened: European leaders agreed on something. Chancellor Merkel eased her iron grip on the purse strings and the European Central Bank hoovered up vast quantities of periphery bonds. Yields in Italy, Spain and Greece tumbled; markets roared ahead. So here we are with the FTSE back up to 5900, just a shade below its March highs and almost unchanged since the end of 2010. But enough looking back, what does 2013 hold?

 

UP

Equities

Gold

Oil

DOWN

Treasuries

Copper

Aluminium

 

Goldman is bullish on European equity

Goldman Sachs has a target of 6500 for the FTSE 100 by the end of next year and it targets similar double-digit returns across Europe. Goldman says it remains positive on the long-run outlook for equities relative to other asset classes, adding that shares are pricing in too much risk. Conversely, its fixed-income specialists think there is too much money in government bonds and say government bond yields are "exceptionally low" and have turned bearish on the outlook. They believe a gradual rebalancing into equity will support markets next year.

This seems at odds with their view that: "Europe, we expect to remain firmly in stagnation at best through 2013, with little improvement into 2014." Goldman also expects the gap between the German economy and the periphery to widen, adding further strain to political relationships.

BlackRock is cautiously positive for 2013

BlackRock boffins couldn't quite be tempted down from the fence as they said: "We generally like equities for 2013. But we are not enamoured." They also sound a warning over government bonds, adding: "It takes just a miniscule rise in yield to trigger sizable bond price losses." BlackRock goes on to say that markets may pre-empt the Fed, and trigger a rush out of fixed income and into equities, and that safe-haven assets like fixed income may well provide disappointing returns from here.

BlackRock thinks any flow out of income next year could prompt a temporary "dash for trash" with quality businesses and dividend stocks underperforming leveraged companies. However, over the long term it prefers global companies such as high-quality US stocks and discounted exporters on Europe's periphery, and small "self-help" UK companies.

 

 

Barclays sees risk falling next year - S&P target 1525

Barclays' head of research, Larry Kantor, said: "One important development associated with increasingly aggressive central bank support is a reduction in the systemic risks - from euro area dissolution, to a China hard landing and a financial system collapse." Mr Kantor says this development will see markets move away from "risk on" and "risk off" modes dictated by macro concerns.

Barclays echoes the call of many to overweight equities relative to fixed income next year, but only in developed markets. Mr Kantor says: "Our investment recommendations are characterised less by weighting one asset class over another, and more by specific recommendations within each asset class. Even our call to overweight equities relative to fixed income is related to developed markets only."

 

 

Selftrade says funds could flow into equity in 2013 and the FTSE 100 could hit 6400

"Cash returns are so poor and returns on the likes of gilts so pitiful that investors have been looking towards corporate bonds, which could have created a bubble. If sentiment turns in 2013, funds could come out of those sectors and into the equity market," said Dr Stephen Barber, economist at Selftrade.

Mr Barber thinks next year could also unleash the spending power of corporates hoarding record cash piles. This re-investment in growth rather than returning funds to shareholders through share buy-backs and one-off dividends could help break the FTSE's two-year jinx at the 6000 level.

The Share Centre sees an improving macro picture and the FTSE 100 at 6600

On the issue of the US fiscal cliff Helal Miah, investment analyst at the Share Centre, said: "We believe something will be done, compromises will be made, and that will be very good for the markets." He believes that this, combined with resilient data from the US and improving manufacturing data from China, will drive returns of 10-15 per cent in the FTSE 100 next year.

 

FTSE 100 forecasts

20122013
Killik & Co61006500
The Share Centre65656600
Charles Stanley58006200
Brewin Dolphin58506350
Goldman Sachs58006500
Selftradena6400
Average60236425
FTSE 1005912
*As at 17 December 2012

 

Killik & Co says the valuation of UK small caps is attractive and sees the FTSE 100 at 6500

Analysts at Killik & Co believe any global economic worries will be outweighed by strong corporate balance sheets, reasonable valuations and an attractive dividend yield. They forecast the FTSE 100 to deliver 10 per cent returns as the market moves from a PE ratio of 10 to 12 and the prospective dividend yield falls to 3.5 per cent.

The best place to look for returns is right here at home in UK small caps, according to Killik & Co. "We believe the valuation of this out-of-favour asset class is attractive - over the past 10 years, the Small Cap sector (ex-investment trusts) has traded, on average, at a 9 per cent premium to the FTSE All-Share index, whereas it is currently on a 9 per cent discount."

 

 

HOW DID THE 2012 FORECASTERS FARE?

Well a quick look at the table on the right shows they did pretty well, and on average are just 1.9 per cent away with two weeks of the Santa Claus rally still to run. Brewin Dolphin called it fairly accurately a year ago when the broker said it expected markets to gain support from a more encouraging outlook for the US economy and more conventional policy stimulus from developing economies and China in particular.

What does Brewin Dolphin think 2013 holds? Mike Lenhoff, chief strategist, says the global economy is on a better footing to enter next year, and this should help it overcome the resistance level at 6000 in the New Year. His target for the FTSE 100 of 6350 could prove conservative, he says, if reason prevails and the US reaches a deal on its budget. This he believes would improve the outlook for the global economy, pushing equity markets onwards and upwards.

Mr Lenhoff isn't all festive cheer, though. He warns that the US recession may prove to be deeper and more protracted than the Congressional Budget Office has forecast. China's new leaders may not be able to stabilise the economy. In Japan conservative forces may resist new Prime Minister Abe's plans to increase easing measures. And in the eurozone all sorts of difficulties lie ahead along the road to full integration.