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Michael Baxter

Forecasts for the markets in 2014

Written by: Michael Baxter on December 31st 2013

Category: Thought for the day

The FTSE 100 began 2013 at 5897, at the time of writing it stands at 6,731. What will it do this year?


The Dow, by the way, began 2013 at 13,104, and hit a new high yesterday: 16.504.  There are a few anomalies regarding the FTSE 100. I am not sure there was any country in the world that has seen such a sharp turnaround in economic prospects as the UK, yet the FTSE 100 has not been one of the better performers. The Index rose by 15 per cent from the year start to peak value. The Dow rose by 23 per cent, the NASDAQ by 34 per cent, the Dax by 24 per cent, the Nikkei 225 by 52 per cent and the Hang Seng by 46 per cent. Of all the indices I keep a close eye on, only the Chinese CSI 300 saw a weaker performance.

I don’t think you need to look far for the explanation for the FTSE 100’s relatively poor performance. What we are seeing is the flipside of what we have seen in the last few years. The fact is that given how awful the economy has been, the FTSE 100 has done okay over the last few years, and the reason for this is because of its high exposure to stocks whose performance are not related to the UK economy.

The FTSE 100 has not done as well as, say, the Dow, because of the disappointing stats on emerging economies. Vladimir Putin may be trying to rebuild the Soviet Union, but the Russian economy is not so good. In fact 2013 has been a year of BRIC related disappointment. And ever since the Fed has been talking about tapering QE, the prospects for the next tier of emerging countries have not looked so good. 2013 was not such a good year for commodities either, and all this helps to explain why the FTSE did not do as well in percentage terms as other indices.

In 2014, the indices exposed to economies outside the UK will continue to be a negative factor – although I think this is positive thing long-term.

But there are other reasons to think the index will do well.

The cyclically adjusted PE ratio, which compares valuations with average profits over the last 10 years, is 12.9, which is well below average. In the US, the equivalent measure for S&P 500 is 25.

Capital Economics reckons the proportion of profits to GDP will rise this year too and also forecasts a fall in sterling. This will benefit companies listed in the FTSE 100 whose turnover is primarily in currencies other than sterling.

But I can see another reason for the index to rise.

I think we are entering a sweet spot for mergers and acquisitions. The best time to complete a leveraged corporate purchase is when the economic prospects are improving, but before interest rates rise. The time for this is now.

Earlier this week, I forecast that rates may stay where they are next year, but will rise sharply in 2015. For many companies and private equity firms 2014 will be the perfect year for M&A activity. It will be contagious. The higher the M&A, the more other companies will jump on the bandwagon.

The effect will be twofold:  firstly shares will rise, and secondly, shareholders in companies that have been sold will be flushed with money – they will re-invest it.

I reckon the FTSE will pass 7,000 next year, and peak at around 7,650 in 2014.

 

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: cyclically adjusted p/e ratio, sweet spot for mergers and acquisitions

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