Written by: Michael Baxter on December 12th 2013

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include: Is this right: FTSE 100 to pass 7,000 next year? And Chambers make a near bullish forecast on UK economy. And Capital Economics joins the bull camp. BCC forecasts 2014 pick-up. MPC man in Forward Guidance warning. Tesco’s bank

Is this right: FTSE 100 to pass 7,000 next year? 

Maybe it is the riddle of the moment. The UK economy is expected to see a sharp improvement next year, but will this be good or bad for equities? The argument to say it will be good is fairly straightforward; the economy is expected to improve, ergo so will equities. The counter argument is less intuitive. If the economy improves, interest rates may rise and QE may be halted altogether in the US, ergo asset prices will fall.

But, as a survey from the Association of Investment Companies (AIC) found, no less than 84 per cent of fund managers think the FTSE 100 will rise next year – which begs the question: who are the 16 per cent who think it will fall or stay flat?

The AIC survey found that 58 per cent of those it surveyed think the FTSE 100 will finish next year over 7,000, 32 per cent think it will finish between 6,500 and 7,000 – right now it is a smidgen less than 6,500 – and just 10 per cent think it will finish 2014 less than 6,500.

In terms of regional performance, 24 per cent of fund managers expect Europe to be top, 19 per cent the UK, with the US and Asia – ex Japan – in joint third sport with 10 per cent each.

As for sector performance, 38 per cent tipped small companies, 24 per cent blue chips, followed by financial and commercial in joint third with 10 per cent each. Apparently, it was the first time any fund managers have tipped property since 2007, and even in the heady days of 2007 only 3 per cent tipped it.

Andrew Bell, chief executive of Witan Investment Trust, said: “2014 may be the first year for some time when economic growth is better than expected but it may prove harder going than 2013 for equity markets. This is partly because rallies in 2013 have raised hopes and partly that better news on economic growth will lead to (possibly exaggerated) fears that monetary policy will be tightened. Rather as the antelope on the Serengeti can sense coming rainfall long before it falls on their heads, financial markets tend to look ahead and may already have factored in the good news. Crowded trades, like crowded plains, can be vulnerable to disappointment (lions).”

And Capital Economics joins the bull camp

And now Capital Economics has forecast that the FTSE 100 could hit 7,500 in 2015. It pointed out that the cyclically adjusted pe ratio of the FTSE 100 is 12.9, which is below the ten year average, and compared it to a reading of 25 for the S&P 500. It also pointed out that profit share of GDP in the UK is still below the historic average, and said: “We think that the greater degree of spare capacity in the UK economy will make it that much easier for firms to expand output without adding to their cost base.”

But while it is bullish on the FTSE 100, it said that the S&P 500 will reach a mere 1,850 in 2015 – it stands at 1782 at the time of writing.

BCC forecasts 2014 pick-up

Actually, predicting pick-up next year is no big deal, but the latest forecast from the British Chambers of Commerce (BCC) is amongst the most bullish seen so far.

It is now forecasting that the UK will expand by 2.7 per cent next year, from 2.4 per cent previously predicted. In the process, it says the UK’s total output will pass the pre-recession peak in the second half of next year.

It said: “Household consumption (which accounts for two-thirds of UK GDP) is expected to be the main driver of growth in 2013 and 2014, boosted by the strong housing market.”

Some of the media focus on this report has highlighted the Chambers’ fears about debt levels pushing down on growth in 2015. It is true that it has expressed a doubt, but nothing particularly dramatic.

It has revised its forecasts for 2015 downwards all the way from 2.5 per cent to 2.4 per cent – hardly a revision to write home about, let alone justify headlines of doom.

John Longworth, director general of BCC, said: It is really great that next year the UK economy is finally expected to bounce back from the deepest recession in modern times. British businesses have remained determined to compete and grow in the face of difficult circumstances, and the upgrading of our short-term forecast is testament to their sheer hard work, resilience and creativity.”

Bear:      He did add, however, that: “We must acknowledge that longer-term challenges are still looming. As household consumption slows in the medium-term, we have to find ways of boosting business investment and exports as rebalancing our economy is critical to our long-term economic future. The confidence displayed by UK firms must be nurtured through more government support. Young, growing firms, and many SMEs, continue to struggle with a lack of access to available credit, while consumers are getting the support they need to buy homes.”

Comment: It is hard to find fault with BCC’s logic. But Bull reckons that 2014 will do even better than the BCC predicts, and that household debt levels will not act as a limiting factor on growth as soon as 2015. But Bear reckons problems will arise later in the decade, unless the government can find a way to encourage more innovation and get investment up, and for there to be less pre-occupation with house prices. Maybe that is a problem for after the election – at least that is what the government might think.

MPC man in Forward Guidance warning

Has Forward Guidance worked? Frankly it appears to be about as good as guide to future interest rates as a reading of the star signs.

But now MPC man, and indeed the man who voted against Forward Guidance at an MPC meeting during the summer, Martin Weale has been speaking.

He said: “I find it inconceivable that, without forward guidance, I, or any of my colleagues, would have already voted to raise Bank Rate and that the only thing that has stopped us is forward guidance…If forward guidance has done no more than to codify what people had expected the Monetary Policy Committee to do anyway, then its effects on the profile of expected future rates, and thus on output and inflation, should be expected to be small.”

And this brings us back to the AIC report referred to above. And indeed it brings us back to the first sentence of today’s bull and bear: monetary policy.

The AIC report said: “20 per cent [that’s fund managers] feel that speculation about potential interest rate rises could spook markets next year, and a further 20 per cent worry that equities are perhaps not as good value as they have been. Some 15 per cent of managers think that tapering of US quantitative easing could be a potential cloud on the horizon next year, 10 per cent cite geopolitical instability and 10% of managers also think high inflation could be a potential risk.”

The AIC survey also quoted Tom Walker, manager of Martin Currie Global Portfolio, who said: “With deflation a more immediate worry than inflation in the real economy (excluding selective asset inflation), central banks are unlikely to kick the QE habit in the year ahead. While money remains abundant and the global economy sluggish, equities are the likely beneficiary.”

Returning to the BCC report, it forecast that the MPC’s unemployment threshold rate of 7 per cent will be reached in Q3 2015, which would mean increases in interest rates are unlikely next year.

But are these views right?

If has been suggested here before, that a sharp pick-up in the UK economy may encourage companies to start releasing their cash mountains. This may lead to much stronger growth but may push up on inflation.

Tesco’s bank

These days Tesco appears to be good with tablets; it may turn out to be good with coffee shops and restaurants; it is very good at pulling out of the US just as the economy appears to be on the verge of seeing sustainable growth, and it is even better at giving up on being a brand name in China. But is it any good at food?

Well, it may or may not be, but here is something else it is trying to be good at: banking. It is going to launch a current account next year.

Kevin Mountford, head of banking at MoneySuperMarket, said: “Tesco Bank’s plans to finally launch into the current account market in 2014 is excellent news for consumers, as it is the first real mass market challenger to the traditional High Street banks. Tesco is a household name with the scale and brand loyalty to enable it to target millions of customers. More specifically, Tesco Bank has already attracted 6.8 million customers by offering a range of competitive financial services products from savings accounts to mortgages.”

Yes that may be true, but is it excellent news for Tesco’s P&L?

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