Next year could see more bank crises in Europe, burst bubbles in Asia and painful austerity in Britain. Alternatively, 2011 might well herald the full-throated recovery long overdue in Britain and the US, and with the Fed still pumping the world full of liquidity, the stock market might even see a bull run.
So what should spread betters look out for in 2011?
According to Michael Hewson, market analyst at CMC Markets, the three sectors to watch are banks, miners and retailers, all of which should have very interesting years.
Hewson is particularly pessimistic about the banks. “They’re facing lots of problems. Capital requirements are going up, there’s Basel III, and there’s still the potential for a lot of bad debts” he says.
He points to the fact that both Lloyds and Barclays suffered in trading on Friday. Lloyds’ share price lost 6 per cent on Friday morning after an announcement that the bank might be more exposed to Irish debt, though it recovered slightly later in the day. With European sovereign debt worries still unresolved, spread betters might make good profits watching financials.
Not all banks are equally exposed, however. Analysts at UBS reckon that HSBC might do quite well in 2011 – they have moved the bank into their “First XI” of top picks, citing its strong loan/deposit ratio, which is 50 points better than average, as well as strong lending growth in Asia as reasons to be optimistic.
If banks don’t appeal, mining and energy companies should also have a lively 2011. As Hewson points out, buying mining stocks is “basically a commodity play”, but with some 45 per cent of FTSE 100 companies exposed to commodity price shifts, that’s an important play.
With the Chinese government likely to tighten monetary policy to combat high inflation, commodity prices could potentially fall – but it seems unlikely. One particularly good pick might be Rio Tinto. Analysts at both UBS and Credit Suisse believe that the miner should benefit from its pricing power, from rising energy costs and from its iron ore operations.
Finally, retail. British retailers have had a torrid year, with HMV and Game Group particularly hard hit. Game Group’s share price has fallen 37 per cent since January, but with a combination of fierce online competition and austerity likely to hit sales more in the future, it could well have further to fall. UBS expects general retail to suffer more than any other sector as high inflation and low demand eat into profit margins.
For many investors, the prospect of such uncertainty will be very distressing, and it may well dampen the enthusiasm that should accompany a global economic recovery. If they are aware of the risks ahead, however, spread betters can try to harness the storm. Interesting times might well prove to be profitable times.