A beastly battle: bulls and bears to slug it out in 2011

REFLECTING on 2010, FTSE bulls should be grateful that around 60 per cent of the index’s revenues are generated from overseas. Faced with political inaction, a Eurozone sovereign debt crisis putting unwelcome focus on the UK’s own fiscal situation, and austerity measures dampening confidence, it is perhaps a miracle that the blue-chip index is at its highest level since June 2008.

Closing on Friday at 5,871.75, the index has made steady gains since early July. Additional quantitative easing (QE) from the Federal Reserve has meant there has been plenty of extra liquidity coursing through the markets.

But will the FTSE 100 be able to maintain its upward progress in 2011? Alastair McCaig, head of investment management at spread betting-provider WorldSpreads thinks it can, at least for the first three months of the year.

“I think that at least in the first quarter we will still see the FTSE battle higher. It may break 6,000 next week but if it doesn’t then it could have a good crack at it in the first three months of 2011,” he says, adding that it could even get as high as 6,250-6,300.

Yet beyond the first quarter, there’s a good chance that the index could drop below the 6,000 in the second three months. Looking further ahead, McCaig notes: “There’s a good chance that perhaps in the second half of the year – maybe the end of the third quarter, start of the fourth – the Bank of England tries to increase rates, which will take the wind out of the market’s sails.”

ETX Capital’s Manoj Ladwa also expects a difficult year from the first quarter onwards as “we continue with a stuttering, jobless recovery, VAT hike and rising commodity prices”. His end-year target for the FTSE 100 is decidedly bearish at 5,050 – a 14 per cent downside.

In contrast, Morgan Stanley’s UK strategist Graham Secker is cautiously bullish for 2011, with his base case scenario seeing the FTSE end 2011 at 6,400 as sound GDP growth drives profit growth in a reasonably valued asset class.

In his most bullish scenario, Secker suggests a target of 7,000 for the FTSE but points out that this would require highly accommodative monetary policy and fiscal policy to be left unchanged. But should the global recovery run out of steam or sovereign debt fears spread to core Europe, the UK and even the US, then the FTSE could plummet to 3,900, a potential downside of 32 per cent.

But overall, he says: “Notwithstanding a higher level of uncertainty than normal, we believe equities will rise next year, although returns are likely to be volatile. As we move through the year, we think it likely that the stock market will flirt with at least two, if not three of these scenarios at one time or another.”

Even if the outlook for the FTSE remains rather murky, at least spread betters can content themselves with making the most of the volatility.