FTSE looks set to drop as global trends accelerate

IT’S pretty much the same routine every December. The Christmas decorations go up, office parties are in full swing and market analysts are asked to pontificate on where they think the FTSE will finish at the end of next year. The problem is that the FTSE 100 is such a broad-based index that it can be swayed by news from any corner of the globe. Forecasting where it will be in 12 months time is arguably harder than making sure your Christmas tree doesn’t shed all its needles before the big day. But is there anything we can look for to try and make a sensible estimate?

Considering the FTSE’s price action from 2000 to 2009 – which took it from 6,000 down to 3,500, up to 6,750 and then down again to 3,500 – the last three years have been an absolute bore. Since 2010, the FTSE has been stuck between 5,000 and 6,000 and has had a hard time breaking out of that range. Perhaps the biggest single question in 2013 will be whether it can smash the mould and take itself out of this frustrating range.

There’s certainly no shortage of major macroeconomic influencers waiting in the wings, ready to provide the momentum to drive big swings. The US fiscal cliff is arguably the most pressing – the world’s largest economy is clawing its way through a recovery. But severe cuts in spending and big tax hikes would be the sneeze that leaves the whole world nursing not just an economic cold, but potentially a bad case of flu.

After all, one of the overwhelming fears of macro thinkers (think central bankers) across the world is the chance of a global recession. Most of the high profile central banks are using dovish language. They’re cutting interest rates, or instituting quantitative easing programmes to prepare for what they see coming. If we go on the assumption that they know what they’re doing, then we should probably be ready ourselves.

Closer to these shores, the Eurozone crisis keeps rumbling on – Greece is getting the support it needs to keep the wheels spinning at least for now, but it looks like Spain will be next in line and the question remains who will follow after that? Will the crisis start to accelerate towards the core of the monetary union? Or can these actions – and accompanying austerity – shore up the euro in the longer term? One certainty is that failure in the shape of a sovereign default would hit the markets hard and leave many banking stocks reeling as a result.

There’s also the prospect that the Chinese economy finally runs out of steam. We’ve already seen wobbles in Australia, as the nation that supplies so many raw materials to fuel the dragon is seeing signs of weakness. Commodity prices have come unstuck and the effects are being felt. Demand is no longer universally outstripping supply, the reality check is hitting home and the stratospheric rise in Beijing's fortunes will inevitably come to an end. The question is whether that happens in 2013, or at a later date? Those commodity stocks hold a lot of sway in London so, should a cold wind blow in from the East, the FTSE 100 is most certainly going to find itself coming unstuck.

So what do I think? In addition to that gloomy assessment, if we look at the charts there’s clear evidence of a cycle in the behaviour of the FTSE 100 that’s applicable regardless of the underlying situation. This may well end in January 2013 and a drop in value will ensue, taking the market down to levels not seen since 2009. The FTSE will break out of its three year trap between 5,000 and 6,000 and drop down to 4,500 before the end of the year. Here it will consolidate for a small rise and then return once again to that level as the calendar turns to show 2014. That’s right – the FTSE at 4,500 in 12 months time.