Thoughts for 2010 - The FTSE Strikes Back?

We are delighted to present our “Thoughts for 2010” document - following the success of our “Market Outlook 2009”.

Our stock tips for the year reflect our fears for a “double-dip” UK economy with weak Sterling. We favour overseas earnings this year as a theme.

Our tips include large, mid and small caps, including AIM stocks.

We are cautiously optimistic for the FTSE for the year, despite fears for the UK economy and the disruption of the General Election.

We also review the performance of the 2009 tips – which on average returned a very healthy capital appreciation, especially bearing in mind tips ranged from FTSE 100 stocks to micro-caps.

Areas covered in the compendium include:    

  • The FTSE strikes back: Companies moved quickly to rationalise costs last year. By H2, positive earnings surprises and greater stability in the financial markets enabled a significant FTSE recovery. This left us wondering what, if anything remained for 2010. Factors such as the resurgence of the banks, M&A activity (as embodied by the Cadbury bid) and, of course, low interest rates could see continued FTSE 100 strength. For mid and smaller cap companies we also see consolidation as a major driver, with the stronger companies continuing to take out smaller peers at attractive valuations.
     
  • Recession abating but slow growth ahead: Last year saw a 4.8% contraction in UK GDP, the largest reversal since 1921. The economy is gradually improving with very modest 0.1% growth recorded in Q4 2009. We predict 1.2% growth this year from that low base, despite a mixed outlook for the UK economy. We are fearful for companies with exposure to public sector spending. Rising interest rates will dampen the recovery in the UK housing market and limit consumer spend, which is onerous for companies with heavy UK exposure, particularly in manufacturing and retail sectors.
     
  • The general election: We set out our manifesto for the UK. Unfortunately for an already highly taxed nation, fiscal measures are on the agenda. Other key factors aside from reducing government debt include increasing energy security and developing intellectual capital. The election colours our view on the wider economy. If it is difficult enough to predict progress given the economy’s evident fragility, it is near impossible to do so whilst not knowing the makeup of the next government.
     
  • Credit downgrade?: The economy is in a perilous state with record and mounting debt, reduced tax receipts and much less room to manoeuvre in terms of spending cuts than anyone may care to admit. On top of this there are strong murmurings that the UK’s AAA credit rating is under threat (although the last gilts issue was oversubscribed). A rating cut for the UK would be disastrous having a major impact on exchange rates and a significant ripple effect on the market.
     
  • Building on last year’s stock picks +50% aggregate success: Last year’s New Year tips returned an absolute aggregate increase of 50% (though this was not recommended as an investment portfolio). This year looks even more problematic to forecast, yet we look to overseas growth from large cap stocks and build on our key themes of energy security, commodity strength, and differentiated technologies, while increasingly shying away from companies heavily exposed to public sector spend. There is still value to be had but, as always, extreme scrutiny of investment opportunities is key.
     
  • Uncertain times ahead: Whilst we see some improvement for the UK, we are looking at an L-shape rather than V-shaped recovery. Our 2010 estimate is for GDP growth of 1.2% in the real economy. This is marginally below the city’s aggregate outlook for 1.4% growth. The city also looks for 2.1% growth in 2011. While this is positive, it is worth noting that the increase for both years will still leave economic output at below pre-recession levels.
     
  • A challenging year: The UK’s AAA rating is under increased scrutiny, with some investors already shying away from UK gilts. Quantitative easing has run its course, inflation will surely rise and the outlook for jobs is mixed with manufacturing and retail (post the VAT reversal) both struggling.
     
  • UK double dip?: With debt spiralling and a weak jobs market, fears of a double dip recession remain. Cut backs in public spending are necessary, but with around 21% of the country’s workforce employed in the public sector (according to the ONS), politically this is difficult to implement. While it is easy to talk about reducing bureaucracy in the health service for instance, much of this is in the form of human capital and thus jobs. Therefore increased efficiency = higher unemployment and reduced spending, giving rise to the spectre of a double dip.
     
  • An election year: With the election looming, we set out our alternative manifesto for the country. The election also informs our view on the economy. It is near impossible to predict the impact of the next government with little policy detail so far released, but we attempt to hypothesize the impact policy makers may have on 2010 and beyond.
     
  • The world at large:  The US has suffered greatly but is beginning to rebound. China and India have absorbed the crisis whilst still recording growth and, in so doing, strengthened their positions in the world economy. Eurozone is a very mixed bag with countries such as Greece in deep trouble, manufacturing led Germany emerging from severe recession and high unemployment in France. However, we view overseas earnings as generally more attractive than those generated in the UK. We are envisaging a period of weakness for sterling (a benefit to those translating overseas profits). Of course, in terms of currencies, everything is relative and with substantial problems in Europe and the US, it may even be the status quo that prevails.
     
  • New stock picks: We highlight stocks which offer growth and value characteristics and correlate to our key themes. Energy and commodities remain high on the agenda. We seek the safety of overseas earnings in many of our picks, whilst retaining those companies which offer substantial upside though often accompanied by heightened risk.

 
Plus these additional features... 

 
Stocks featured in this report include... 

Acal, Alkane Energy, AMEC, ANT, Ascent Resources, ATH Resources, Avon Rubber, Bglobal, Castle Support Services, Catalyst Media, Cinpart, Cryo-Save, Geong, H&T, Halfords, IGAS, JKX Oil and Gas, Logica, Matra, NetDimension Holdings, Northern Foods, Paypoint, Photo-Me International, Reed Elsevier, Rotala, Royal Dutch Shell, RSM Tenon, StatPro, S&U, Ten Alps 

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