Sunday, 4 January 2009

OT- FTSE prediction for 2009

You may remember that I predicted the FTSE100 to be at 4,800 at the end of 2008 and at 3,200 by the end of 2009. Well it finished at 4434 on 31 December, so I suppose I wasn’t too far out.

In practice, the slump went faster than I predicted, and one could argue that, with the low spot of below 3,800 in November combined with a 25% reduction in the value of sterling, the FTSE dropped near the 3,000 level in real terms......

Looking forward, let me repeat my belief that the majority of UK banks will be nationalised over the coming months (with perhaps Barclays opting for middle-eastern sovereign funds rather than UK taxpayers’). They still haven’t come clean about the extent of their exposure to toxic loans, CDO’s etc ... and with the impending defaults on corporate loans by many UK companies they will just not have enough cash to survive.

With the banks nationalised, what will happen to some of the businesses that fail? As I’ve noted
before, the UK Government seems destined to nationalise several major business over the next few months, many unintentionally. I believe that as highly leveraged organisations default on their loans to banks that will by then be nationalised, Government will have difficult political decisions to make – let the companies fail, with the consequent loss of jobs amongst the electorate – or bail them out. In some situations the banks will have no choice but to take on ownership to try to recover some of their losses, but in a nationalised banking environment where politicians will undoubtedly make many of the decisions, I suspect more will pass into public ownership than would normally.

My view is that the FTSE100 will drop to 3,200 – most probably around April – followed by a dead cat bounce, and then a return to around 3,300 by the middle of the year, with a recovery starting in September leading to the FTSE100 rising to around 4,200 by December.

For the sake of completeness, my other main predictions are:
* Sterling to remain at or below its current level for the majority of the year, with some improvement towards the end of the year, as...
* the Euro starts to fall apart, with Spain and Italy leading an exit from the common currency, most probably followed by Portugal and Greece.
* Oil to return to the $70 per barrel price by April on the back of political instability in the Middle-East (possibly higher if Iran becomes actively involved).
* House prices to continue to come down, most probably by around another 15% in 2009, continuing into 2010/11 until they bottom out at around 50% of the peak reached in 2007.

Note: This blog is not intended as investment advice – please DYOR (do your own research) on all topics covered.

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