Despite volatility and uncertainty, in what turned out to be a relatively good year for equities, the FTSE 100 finished 2010 at 5899.94 points having reached the 6000 points mark earlier in December 2010.
As trading on the London Stock Exchange opened for business for 2011, optimism was overriding pessimism over the VAT increase and what the leader of the opposition has called the ‘year of consequences’.
Although some of these gains were pulled back as trading continued during the week and most commentators see the volatility of the last year in equity markets continuing.
The stock market
After the stock market rally into the end of 2010, there are mixed views on equity investments and the opportunities for stock market performance.
With emerging markets posting a strong year for growth, head of global strategy and asset allocation at Aberdeen Asset Management, Mike Turner, points to Asian and other emerging markets as providing the power for economic growth again in 2011.
With interest rates likely to remain low the return on cash investments will be limited, which Aberdeen says will lead some searching for yield to invest in equities.
While economic growth in many developed economies is predicted to be muted in 2011, a theme for some fund managers is seeking out the potential returns from equity investments in these markets, such as the UK, US and Europe.
One theme for developed market funds is investment in multinationals that are benefitting from growth in emerging markets, and the emerging middle class.
This has been a strategy of the JP Morgan Global Consumer Trends fund, while Robert Hagstrom of Legg Mason Global Asset Management says US multinationals will be competing with other multinationals to capture new consumers in developing economies.
“The current hesitation to invest in US multinationals appears to reflect worries about domestic economic growth. This hand-wringing may prove costly because it underestimates and undervalues the continued growth in developing markets that is a near certainty,” Hagstrom said.
On emerging market investments, many believe emerging economies will continue to grow, but there are increasing concerns about inflation, tighter monetary policy to restrict the inflow of money and assets becoming over-inflated.
In a recent outlook for 2011 Legal and General Investment Management said: “We are now less keen on emerging markets after their strong relative performance in 2010. Inflationary pressures are building and not just in commodities. In contrast to the West, labour markets are tightening and wage pressures will add to costs.”
In terms of the domestic equity market, companies that provide consumer basics or necessities are preferred by some commentators as a robust performer when consumer spending may be tight.
Following strong performance in 2010, some UK smaller companies funds are also seen as another source of potential growth. This will partly be linked to how the UK economy fares, but exposure to international markets is also likely to be a key area for these funds.
Several investment houses remain positive on the returns from corporate bonds. Andrew Wells, global chief investment officer of fixed income at Fidelity said: "I believe investment grade corporate bonds offer the best mix of risk and reward for next year and it's likely that we will see mid-single digit returns from this asset class.
“Heading into 2011, companies are in good shape - leverage is falling, rating trajectories are improving and the willingness of corporates to borrow to invest is low.”
Head of global strategy at Standard Life Investments, Andrew Milligan, said in a recent edition of its global perspective commentary that corporate bonds were preferred in a ‘moderate economic environment’ rather than recession conditions. He also said higher yielding debt was becoming more attractive.
“Although investor confidence will wax and wane periodically, over the year it should improve as more investors recognise that the economic recovery does have momentum and the corporate sector remains in good shape,” Milligan said.
Adding that income and growth opportunities could be found across the credit (bonds), equity and property markets.
Research by Fair Investment in November 2010 showed strategic bonds were the preferred investment sector for investment through the Fair Investment fund service between January and October 2010.
Strategic bond funds have the flexibility to invest right across the bond market, in government or corporate bonds, including higher yield bonds and emerging market debt.
The need for diversification is ever important, especially when markets are volatile, to reduce exposure solely to one type of asset or region.
Chris Stevenson, vice president at Barclays Wealth said: “Product diversity and attention to asset allocation will remain of utmost importance in 2011. The past three years have been a rollercoaster ride and there is nothing to suggest that this is not the new ‘market-norm’.”
Stevenson said having a more carefully constructed portfolio that can take advantage of peaks and ride out the troughs would be crucial.
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