Will The FTSE 100 Surge 8% In 2013?

Published in Investing on 19 December 2012

Well, that's one prediction...

The FTSE 100 (UKX) is set to surge by 8% in 2013. That's the prediction of one investment manager, Legal and General Investment Management. No doubt there will be many more by the end of the month.

Perhaps unfortunately, LGIM's prediction was released on the same day that Margate was tipped as one of the top 10 places in the world to visit in 2013. That possibly says something about how much reliance can be placed on forecasts.

Bullish

But there are good arguments to underpin LGIM's bullish outlook. It points to how cheap shares look compared to government bonds, yielding approximately twice as much. And it sees modest growth in corporate profits: not from the UK economy, which it expects to remain sluggish, but from overseas markets such as the BRICs. It therefore expects investors to shift allocations into equities for their better yield and earnings prospects.

It's a 'top-down' forecast based on economics and, whatever the actual numbers, is a plausible argument that the FTSE 100 will enjoy another year of good growth. Barring the US falling off a fiscal cliff, a meltdown in the eurozone, or some other Black Swan/Grey Swan/end of the Mayan calendar cataclysmic event, I'm inclined to believe it.

Concentrated

But one of the remarkable things about the FTSE 100 is just how concentrated it is. Just three sectors -- oil and gas, financials and mining -- make up half the index. And the top four shares, HSBC (LSE: HSBA), BP (LSE: BP), the two share classes of Royal Dutch Shell (LSE: RDSB) and Vodafone (LSE: VOD) make up over a quarter.

So the prospects for those four companies and three sectors will give a pretty good steer to what the index does. It's a 'bottom-up' way of looking at the FTSE 100.

Slow-burn

With its sprawling international operations, HSBC is something of a proxy for the global economy, skewed towards the developing markets of Asia and Latin America. That should give it long-term, slow-burn growth, while its diversity cushions downside risk. The bank was relatively resilient in the financial crisis, and is a good long-term hold.

The rest of the banking sector -- especially Lloyds, RBS and Barclays -- are more geared to the UK, Europe and the US. There's a good chance they'll enjoy a strong year with the two state-owned banks in particular making progress in clearing out their balance sheets and turning around their performance. However, all of them are vulnerable to a eurozone blow-up.

Oilers

Shell is a good, diversified play on the sector but its big investment in US shale gas, where the exploration glut has depressed prices, will weigh on its performance. Still, on a price-to-earnings ratio of under 9, it's a great share to hold.

BP is far the more adventurous, and risky, share. With hopefully litigation in the US out the way in early 2013, its shares should gradually be re-rated by the market as its new big Russian play starts to deliver to the bottom line.

Vodafone is the most defensive of the four stocks that make up a quarter of the FTSE. Though its southern European operations have been suffering this year as cash-strapped Italians, Greeks and Portuguese pared back their spending, there is little doubt that mobile phones have become a basic necessity of life. Vodafone is generating a healthy cash flow, and it's hard to argue with a 6% yield.

Defensive

So defensive stocks are still where most of my money is going. I'm encouraged that Legal and General see more money going into equities and generally I'm bullish about the market. We'll know by the weekend if the end of the Mayan calendar heralds the end of the world (or if it's just another example of bad forecasting), and early 2013 should see some resolution of the US fiscal cliff.

But the eurozone debacle will hang around for the whole of next year, with the potential to wreak havoc on markets. So I am still biased towards stocks that would suffer relatively lightly.

Not losing money is just as important as making it, if you want to build your wealth. And many defensive shares have attractive dividend yields, much higher than bank interest rates. What's more, reinvesting dividends makes a real difference to how your wealth grows. This special free report from the Motley Fool, "Ten Steps to Making a Million in the Market", tells you how an investment in one particular defensive share, held for ten years with the dividends reinvested, would have generated an average compound return of 22% a year for 10 years. I recommend you download it now.

> Tony owns shares in HSBC, Shell and Vodafone but no other shares mentioned in this article. The Motley Fool has recommended shares in Vodafone.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

QuantumDealer 19 Dec 2012 , 11:01am

I do not think that an 8% rise over a 12 month period can ever be described as a "surge".

ProfessorMarcus 19 Dec 2012 , 11:15am

I'm in two minds. Whether to continue regularly investing small amounts or to totally sell up and move to cash!

lotontech 19 Dec 2012 , 11:17am

The FTSE has "surged" 8%-ish in the past month: http://goo.gl/fb/ik6mC

Christmas has come early!

atalbot9 19 Dec 2012 , 11:30am

@ProfessorMarcus

You should read a few related chapters of Benjamin Graham's Intelligent Investor; it guides you how to invest without thinking should I do this, or that, or have I missed the boat, etc. A good stocking filler!

ProfessorMarcus 19 Dec 2012 , 11:41am

Hello atalbot9. I have an electronic copy somewhere so I'll take another look!

F958B 19 Dec 2012 , 11:56am

I'll take the opposite side to L&G and go for -8% in 2013 and much worse in 2014.

BigJC1 19 Dec 2012 , 12:07pm

I predict 2013 will be the year when people realise the sky isn't falling in, that holding cash is a mugs game as the UK Government/BoE is hell bent on letting inflation reduce their debt burden, that the financial sector is re-rated substantially upwards and investors wake up to the fact that, in general, UK shares with an international dimension are undervalued.

Alternatively people could still be fascinated by that over rated shiny metal which makes nice jewellery and circuit boards.

F958B 19 Dec 2012 , 12:32pm

BigJC1

I'll take the other side of your gold trade, too. I actually have money in place to buy gold imminently, with my finger hovering over the "buy" button.
I expect gold's "worst case scenario" to be that it matches equity markets.
Best case is that gold goes ballistic (+40%) in response to wobbly government fundamentals, QEternity and abandonment of inflation targetting.

sludgesifter 19 Dec 2012 , 1:09pm

[b]"... how cheap shares look compared to government bonds, yielding approximately twice as much"[\b]: This ratio is not meaningful, particularly in an ever-present inflationary environment. More relevant, perhaps, would be the [i]difference[\i] between the equity market yield and the expected [i]real[\i] (or index-linked) government-bond yield.

jeff700 19 Dec 2012 , 1:39pm

Nothing has changed, the best investment strategy for next year is exactly the same as last year and the last 10...Sell shares on the rallies, buy gold on the dips!!

salmo365 19 Dec 2012 , 2:49pm

This year the S&P500 is up 15%, Euro Stoxx is up 14.8%, The Dax is up 30%, The Nikkei up 20% the Hang Seng up 22.7% and yet the FTSE is up only 7.2%.

Look at the mess europe is in and see how their shares have doubled our rise and the Germans have quadrupled.

Either the UK listed companies are far worse performers than their international peers or they are extremely undervalued and due a re-rating.

I know which camp I am in.

theRealGrinch 19 Dec 2012 , 6:52pm
goodlifer 19 Dec 2012 , 11:14pm

I can almost guarantee the market is going to rise substantially throughout the foreseeable future.
Why?
(a) because, as a dividend reinvestor I would obviously prefer it to fall, and
(b) because around 90% of the experts invariably predict it's going to fall.

apprenticeDRL 20 Dec 2012 , 9:14am

In principle, if the market falls I will buy more shares in great companies at low values. If the market rises the overall value of my portfolio and hence my wealth increases.

Win Win really

goodlifer 20 Dec 2012 , 10:48am

apprenticeDRL
"Win Win really."

True.
But, as a net buyer, I'd still rather it went down.

apprenticeDRL 20 Dec 2012 , 6:20pm

Goodlifer
'But, as a net buyer, I'd still rather it went down.'

I agree with you

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