Since our last report on the 21st of December FTSE 100 closed up 6.1% at 5534.2 with the FTSE Aim All Share up 6.8% at 687.2 since the 14 of December. Last week was busy for economic news housing, interests rates and there is no let up this week as there are US and UK trade balance figures, consumer price index readings from both Europe and the US, and an insight into American consumer activity by way of retail sales. We comment below on the Big Picture for 2010 and back to company reports next week.
Big Picture forecasts for 2010?

Firstly, 2010 as a ‘Year of 2 Halves’ because of the election. The first half will be dominated by pre-election posturing and the second half by the economic reality because whichever party assumes power will have to tear up Alasdair Darling’s recent pre-Budget report and his March Budget and establish an economic framework that properly addresses the UK’s burgeoning debt mountain.

We have tried to categorise our comments in light of the above expectation, so here goes:

2010 the Election Year
1st half will be dominated by political posturing and spurious rumours of a snap election that will create significant market volatility

Conservative landslide

Hung Parliament – possible and would be bad for markets because there would be a hamstrung Administration;

Small working majority

Labour – more of the same, the probable loss of the UK’s AAA bond rating and bad for markets; and

Conservative – tear up the March Budget and issue an Emergency Budget to address the UK’s distressed economy and preserve the UK’s AAA credit rating by establishing a credible plan to address the budget deficit; and take the inevitable but painful decisions to shrink the public sector that, generally, should be good for markets.


UK should have crawled out of recession during Q4 2009 or Q1 2010 but the recovery will be anaemic, even though starting from a statistically low base;

Economic recovery will be constrained due to the persistent lack of readily available credit, consumers repaying debt, reversal of ill-conceived, panic tax concessions (e.g., reduction in VAT), reduction in tax thresholds and newer taxes (broadband tax, higher NI in 2011 and the spitefully, destructive ‘City’ bonus tax) will inexorably drain further cash from businesses and consumers. In addition, transport and utility costs and Council taxes will also move upwards adding to the progressive and relentless reduction in discretionary spending capacity;

Unemployment will continue to rise and post the election the rate of increase could accelerate in both the public and private sectors;

Quantitative Easing may have to end because of the present Government’s inability to stem the rise in borrowing;

Consequently, interest rates will either remain at 0.5% or be reduced further to possibly 0.125% or lower in an attempt to provide some further stimulus to a weakening economy following the implementation of a draconian post election Emergency Budget.

Credit demand is likely to remain constrained as consumers continue to reduce their indebtedness and the banks rebuild their balance sheets;

Inflation will temporarily exceed the Bank of England’s target range due to the reversal effects of earlier cuts in VAT and subsequent recovery in utility costs but the underlying trend probably remains subdued;

Sterling may weaken against both the US$ and € as the US and the leading European (Germany, France and Italy) economic recoveries build momentum; and

UK’s AAA credit rating will only be maintained if a credible and manageable budget deficit programme can be established by whichever Administration is elected in mid-2010. Since this is likely to be a long term programme, the next Chancellor of the Exchequer will be committing several future Government’s to specific and strict targets.

Gold price may hold onto its 2009 highs through most of 2010. Indeed, the gold price may push to slightly higher levels before its upward momentum finally peters out. Thereafter, there is likely to be a period of plateauing before the price starts to weaken into 2011 as alternative investment demand rapidly subsides as the global economic recovery builds momentum and further evidence emerges of the strengthening of the global financial system.

Oil price (Brent) is likely to remain within OPEC’s managed range of US$70 – US$90 bbl as supply and demand are broadly maintained; and

Equity Markets
Overall equity markets, as measured by indices, are looking tired after the 2009 run and by the end of 2010 may be broadly similar level to their January open.

The first half of 2010 will be heavily influenced by election fever creating substantial volatility. But the underlying trend is likely to be down because the refinancing of UK corporate balance sheets has not finished due to credit markets remaining constricted. Indeed credit may get tighter in 2010 due to rollover effects of Gordon Brown’s long term economic mismanagement, which creates further credit defaults that in turn weaken already drained bank balance sheets;

The second half will then respond to the economic reality that the new Administration’s Emergency Budget will establish, which may create a period of sector rotation or portfolio repositioning;

Nevertheless, M&A activity should steadily increase as the year progresses thereby providing much needed support to the indices. Investor preference will be for cash offers rather than paper/cash or pure paper offers. Moreover, M&A activity will be led by overseas rather than UK companies;

IPO market will remain very subdued until corporate balance sheets have been successfully refinanced. Even then, investment appetite is likely only to be for the best and most attractively priced issues; the failed Gartmore IPO clearly demonstrates the point.

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