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The outlook for every FTSE 350 share

FTSE 350 REVIEW: Our team of sector specialists analyse prospects for the year ahead on no fewer than 44 sub sectors of the stock market
January 14, 2010

If the annus horabilis of 2008 was the year when risk aversion was the name of the game then 2009 was undoubtedly the year when investors were paid handsomely to take on risk albeit after a torrid first two months during which time the FTSE 350 plunged by 21 per cent. However, since hitting a bear low in early March, the index has rallied almost 60 per cent as investors' risk appetite for equities returned, helped in part by the ultra-easy monetary policy pursued by central banks on both sides of the Atlantic. And with it a new bull market was born.

Not surprisingly, investors rotated early on out of defensives and into the cyclical stocks set to benefit most from any economic recovery. The usual suspects head the leader board; the mining sector, mining sector which, following a 77 per cent plunge in 2008, more than trebled in value last year, underpinned by a sharp rebound in commodity prices. This was in part led by restocking by China, but also by dollar weakness and the emergence of the US dollar carry trade whereby investors used the greenback as a cheap funding source to finance investments in higher risk assets.

Technology investors have reaped hefty rewards too, with the hardware sector ahead 131 per cent and software and computer services powering up 64 per cent. General retailers and engineers also made it in into the top 10 performing sectors.

FTSE 350 SECTOR PERFORMANCE STATISTICS FOR 2009

FTSE 350 SECTORONE-YEAR PERFORMANCE (%)
FTSE 350 INDUSTRIAL METALS & MINING307.4
FTSE 350 TECHNOLOGY HARDWARE131.6
FTSE 350 MINING 108.5
FTSE 350 PERSONAL GOODS 105.8
FTSE 350 OIL EQUIPMENT & SERVICES87.8
FTSE 350 INDUSTRIAL ENGINEERING83.1
FTSE 350 AUTOMOTIVE & PARTS  78.7
FTSE 350 GENERAL RETAILERS 75.2
FTSE 350 FORESTRY & PAPER64.4
FTSE 350 SOFTWARE & COMPUTER SVS  63.9
FTSE 350 INDUSTRIAL TRANSPORT52.3
FTSE 350 H/C EQ & SVS 47.0
FTSE 350 CHEMICALS 43.8
FTSE 350 FINANCIAL SERVICES39.8
FTSE 350 EQUITY INVESTMENTS INS31.3
FTSE 350 HOUSEHOLD GOODS & HOME CONSTRUCTION30.9
FTSE 350 REAL ESTATE30.7
FTSE 350 BEVERAGES 28.9
FTSE 350 SUPPORT SERVICES28.7
FTSE 350 MEDIA 28.3
FTSE 350 LIFE INSURANCE 26.6
FTSE 350 FOOD PRODUCERS 25.1
FTSE 350 BANKS 23.8
FTSE 350 GENERAL INDUSTRIALS23.2
FTSE 350 ELECTRONCIS & EOPECTRICAL EQUIPMENT23.0
FTSE 350 TRAVEL & LEISURE22.5
FTSE 350 AEROSPACE & DEFENCE15.8
FTSE 350 OIL & GAS PRODUCERS  13.2
FTSE 350 FOOD & DRUG RETAILERS12.5
FTSE 350 TOBACCO 9.9
FTSE 350 REITS6.2
FTSE 350 MOBILE TELECOMS4.6
FTSE 350 PHARMACEUTICAL & BIOTECHS4.2
FTSE 350 GAS/WATER/MULTI UTILITIES-0.6
FTSE 350 CONSTRUCTION & BUILDING MATERIALS-0.7
FTSE 350 ELECTRICITY-1.0
FTSE 350 FIXED LINE TELECOMS-1.7
FTSE 350 NONLIFE INSURANCE-1.7
FTSE 350 INDEX24.5
FTSE 100 INDEX22.1
FTSE ALL SHARE INDEX25.0
FTSE AIM 100 INDEX58.7
FTSE AIM ALL-SHARE INDEX65.9

Even after a 10-month bull run, investors were showing no signs of fatigue at the turn of this year with major global indices bouncing back to levels not seen since the Lehman Brothers crisis in the autumn of 2008. And they are probably right to remain bullish, for the near-term at least. As stock market historian David Schwartz points out, there have been no fewer than 19 bull markets in the UK in the past 100 years and all but one ran for at least 14 months. However, for the party to run and run we will need to see a sharp earnings recovery coming through to justify current valuations.

For instance, according to Charles Stanley Stockbrokers, the FTSE 100 is expected to produce 30 per cent earnings growth in 2010, driven by a bounce back in earnings in the mining, oil and financial sectors. If this transpires then the earnings multiple on the index falls from around 16 for 2009 to a far more manageable 12.5 for 2010. The same is true on Wall Street, with the earnings of the S&P 500 forecast to increase by 25 per cent in 2010 to take the prospective PE ratio down to 14.5.

Nevertheless, it's not difficult to foresee some stiff market headwinds for equity markets ahead, the obvious being when the monetary authorities decide to turn off the liquidity taps. And as so often is the case, prospects for the UK equity market this year will ultimately be driven by events on Wall Street. Teun Draaisma, equity strategist at Morgan Stanley, notes that there is always some sort of equity market correction around the start of the period of monetary tightening (after the US emerges from recession), adding that the average fall for European equities is 13 per cent over six months, beginning typically with the first rate rise.

However, following such stellar share price gains already, equity market weakness could easily commence when liquidity starts to be withdrawn (perhaps as early in the first half of the year), rather than around the time of the first Fed rate hike, which is expected to occur in the second half. By then investors may not need too many excuses to start banking profits as on most valuation measures the US market is already priced above its long-term historic average. For instance, the cyclically adjusted price/earnings ratio on the S&P 500, which shows prices as a multiple of average earnings for the past 10 years, is above 20 once again against a historic average of 16.3.

The bulls will be sincerely hoping that reported earnings on both sides of the Atlantic deliver on the above bullish consensus estimates as the further markets rallies from here, the less forgiving investors will be for any disappointment.

To help you spot the winners and position your portfolios in the right direction in the year ahead, we have analysed every single FTSE 350 sector and provided key data on all the companies (share price, market value, PE ratio, dividend yield, and the Investors Chronicle's most recently published recommendation on each company).