The sun shines brightly upon a shiny New Year – figuratively speaking. It doesn’t look too shiny from my office window today! In truth, it has been a somewhat grey, wet and windy start to 2011. “Enough of the weather, what is your forecast for investment markets?” I hear you say (possibly). Well, forecasting is a dangerous game, and whilst I am quite pleased with my predictions for last year, to be fair, it was a much easier climate in which to take a view. My personal feeling is that this year will be one of increasing volatility. We have seen this over the past 12 months, with a broadly positive outlook, but whilst I am still positive about the majority of investment markets over the next 12 months, there are many factors that will affect daily and weekly performance – both positively and negatively.

The major factors that the UK market may have to overcome, in the main, are: inflation, economic austerity measures, unemployment, and the threat of an increase in interest rates. Add to these, the external factors, such as: potential currency risks, the financial instability in some euro-zone countries, and the possible slowdown in the emerging markets, the growth in which has provided a lot of the impetus that has fuelled the rises in the value of many western, first world economies. Many of our leading companies in the UK derive more profit from their overseas earnings than they do from domestic earnings. This has meant that they have received great benefits from the rapidly increasing economies such as China, India, Russia and Brazil, but should there be a slowing-down in the expansion of such countries, the opposite would apply, and if the UK were still to be suffering in an economic winter this would compound the situation.

In general, the Bond markets look to be fully valued. Many Bond Funds have made good gains over the past year or two, and those managers I have been chatting with (the honest ones, anyway) seem to be of the opinion that their job this year is one of wealth preservation rather than producing good returns. Some in the Strategic funds still claim to be able to see areas of value, but I think these will become fewer, and further between. One multi-asset fund manager that I know, has reduced his Gilt and Fixed Interest holding to practically nothing: wary of a hike in interest rates, and the effects of inflation.

If world markets manage to tootle along, without suffering from the dreaded double-dip recession, much predicted by the Eeyore school of economic pundits, then we should see an overall increase in market values, the continued demand should underpin commodity prices, and we may well see a reasonably benign economic situation for the next 2-3 years. However, there is always the possibility of some entirely unexpected event rocking the markets (either natural, or man-made) which could set the recovery back. In any event, it is spreading risk, and perseverance that makes most people a profit, not backing lucky hunches or listening to tipsters. Until next time, what ever you may do, be lucky!

David Foot
david.foot@btinternet.com