Following a turbulent 2010, I am reviewing my equity investments. What is the outlook for 2011 for UK equities?
In the UK, next year is not going to be dissimilar in many ways to this year in terms of the economic backdrop.
We are going to continue to see weak economic growth and while inflation will probably remain above the Bank of England’s target of 2 per cent it is still going to be on the low end at around 3 to 4 per cent and we will see one or two more open letters from the governor of the Bank of England, it is nothing to be too concerned about.
There is a lot from outside the UK that will affect the UK.
What we will probably see is that concerns over European debt will continue into the new year, it may disappear only to re-emerge later in the year and that will act as a potential trigger for markets.
As we are looking at low growth, there is a concern that many countries will slide back into recession. A large amount will depend on the US – as the saying goes, America sneezes and the rest of the world catches a cold. It still dominates world economies and its impact is much bigger than other countries.
Within the UK, unemploy-ment will remain reasonably high.
In terms of opportunities, because there is low economic growth and there are headwinds that could knock that off track, although there are some predictions that growth could be higher than expected, so you will probably have markets trade in a range.
We might see that range move up slightly as positive news comes out, but then we might see it do exactly what it did this year when the market came off heavily in the summer.
So very much more of the same but there will be oppor-tunities for investors. We are very much looking at stockpickers. You will possibly see large-cap companies benefit as there will be growth, just as certain companies will have growth, certain countries will do well, so large brands will probably do well.
Whenever you are looking at funds, good stockpickers in the small-cap arena always have the potential to outperform, as that is where growth is supposed to come from. Good companies can benefit from that.
I think equity income is a relatively good area for investment. Having underperformed in 2009 and 2010, it still has not delivered what everybody was expecting but I think that will change. Whether that will change in 2011 is hard to see but investors are getting good yields there, so they will continue to be a good long-term investment strategy. You are buying good companies with stable cashflow and if the worst-case scenario comes around and we do go back into recession, you have good stable companies generating a yield that will provide a defensive element for investors while reinvestment of dividends over time is a strong argument.
Adrian Lowcock is senior investment adviser at Bestinvest