The long-term annualised volatility of equities has been 20 per cent. Statistically, this implies there's a one-in-six chance of the FTSE 100 ending the year above 6600, and a one-in-six chance of it falling below 4750 by then. So much for statistics. What about fundamentals? There are some very clear trends supporting equities for the remainder of this year, and several clear risks too.
Low interest rates
Whoever wins the election will take an axe to public spending, which makes any big adjustments in monetary policy unlikely. No central bank is going to tighten rates at the same time as government is slashing spending. And if interest rates stay 'lower for longer' – by which we mean the rest of this year – then equities are a no-brainer. Returns on cash will remain so wretched that money will have to flow into shares (and other risky assets).
Sterling weakness
The pound is virtually certain to continue weakening against the dollar this year. That is a big supporting factor for many large-cap companies, in particular whose earnings are largely denominated in dollars. Those dollar profits buy more pounds when they're converted, providing an automatic boost to earnings per share. Even those groups that account in dollars – including the big oils, miners and pharmas – have sterling share prices and pay sterling dividends. A weaker pound just makes price-earnings and yield metrics that much more attractive.
Earnings upgrades
Outside the dollar-earners, there's plenty of evidence that any earnings recession is over. Profitability at banks, housebuilders and retailers took a pounding last year, but should recover going forward. UK plc did a lot of self-help during 2009 in the form of cost cuts, and the combination of lower cost bases plus a recovery in sales could have a dramatic effect on profitability.
Commodities slump
Prices for key metals and energy have rocketed from their 2009 lows, but many argue that this is a function of speculative, rather than real, demand. If a tightening of monetary policy in China, the world's 'swing buyer' of many commodities, dampens demand, then commodity prices could fall sharply. While that would have a positive effect for consuming industries, it would reduce earnings at miners – which constitute a quarter of the FTSE 100.
Sales stagnation
Many companies have maintained profitability by cutting costs. But for profits to grow, they need sales to improve as well. If that doesn't happen, then earnings growth will stall. Continued consumer retrenching, public sector job uncertainty, poor credit availability and lack of corporate investment could all feasibly dampen sales growth.
Sovereign crises
Although the Greek fiscal problems have been papered over thanks to an EU/IMF bail-out package, the potential for sovereign debt crises remains. There are still widespread fiscal problems in some Baltic countries, and markets are still nervous about Spain and Portugal - the latter's debt was downgraded again recently. There's also some concern that a hung parliament here in May could cause an outbreak of jitters about gilts and sterling.
Such crises affect shares because they affect investors' risk appetites - every time there's a fresh bout of the heebie-jeebies about the euro, investors rush into gold, Treasuries and the dollar and desert riskier assets like shares and commodities.
