2010 Fundamental Analysis

As the year draws to a close, it gives us an opportunity to summarise 2010 and look ahead to the next year. City Index Market Strategist Joshua Raymond analyses the past year and gives his thoughts on what’s likely to be in store for the markets in 2011.

The FTSE 100 is on track for a gain of 10.6% in 2010, which is roughly half of the growth the UK Index gained in 2009, having fallen 31% in 2008 as the credit crunch hit. Much of this growth has of course come from a terrific final 6 months performance after the Index suffered an 18% correction in the second quarter of the year as the European Sovereign Debt crisis hit. To that end, investors can give themselves a pat on the back for the 25% rally we have seen since July.

So how has the FTSE shaped up against its main peers across the world? 
The FTSE 100 has lagged its German peer, which posts gains for the year of 17% due to its stronger export led economic recovery, which has undoubtedly been helped by the plummet in strength of the Euro. Other Indices in Europe tell a different tale however with Spain’s IBEX losing most of its 2009 gains, falling some 16.7% in the process. The Italian MIB suffered a similar fate to that of Spain this year, falling 12.7%. There remains a huge cloud of uncertainty over some of the peripheral states within the Eurozone that are saddled with debt with investors fearing that a Irish type bailout  could be on the cards, forcing equity prices much lower.

EU Sovereign debt crisis rambles on
The European sovereign debt crisis was one of the key themes of 2010 and there is certainly much more to play out on this one in 2011. Despite the FTSE 100 rallying 25% since the start of July to the end of the year, the UK banking sector only rallied roughly half that amount, 12.6%, as investors became concerned over bank exposures to sovereign debt within the Euro Zone.

Members of the EU are set to discuss the fine print of a new Permanent Crisis Mechanism in March. This will help to breed confidence that there is a unilateral action plan for indebted nations in need of liquidity. That said, this new treaty is set to come into force in 2013, leaving a lack of definitive action in the near term for those nations such as Spain, Portugal and Hungary that continue to have big question marks over their ability to meet debt obligations. Many investors are calling for a substantial increase in the amount of the EU’s Financial Stability Facility and one feels that a reprieve for both banks and the euro on this issue remains in doubt until the market is satisfied that either no more states will require a bailout or that the EU has both the funds and the unilateral co-operation to help those that do.

Quantitative Easing 1..2..3?
The move by the Federal Reserve towards the end of 2010 to launch an unprecedented second round of Quantitative Easing has certainly helped to swell certain asset classes such as equities and commodities. Ben Bernanke, who rarely disappoints the market, insinuated in an interview with the 60 minutes programme that they would be prepared to increase asset purchases even further should the case warrant and this therefore could mean that Indices may continue to react bullishly to negative economic data.

Retailers facing tough times
It could be a very difficult year for many retailers in the UK with austerity measures starting to bite, the New Year hike in VAT to take effect and the CIPD predicting UK unemployment will hit 9% in 2011, a new 17-year high.

There is a chance that we could see some well known high street brands struggle deeply next year and some may even enter into administration if consumer spending habits contract more than expected and margins are pressurized as retailers cut prices to attract shoppers.

The well known problems of HMV will be an interesting one to watch. The high street retailer told shareholders before Christmas that severe weather was hitting its Christmas trade and that first half losses were wider than expected. CEO Simon Fox admitted that the four weeks of the Christmas trading period would define its full year results and with its share price losing almost 66% of its value in 2010 alone, it could be a defining year for HMV.