Well, that's one prediction...
The FTSE 100 (UKX) is set to surge by 8% in 2013. That's the prediction of one investment manager, Legal and General Investment Management. No doubt there will be many more by the end of the month.
Perhaps unfortunately, LGIM's prediction was released on the same day that Margate was tipped as one of the top 10 places in the world to visit in 2013. That possibly says something about how much reliance can be placed on forecasts.
Bullish
But there are good arguments to underpin LGIM's bullish outlook. It points to how cheap shares look compared to government bonds, yielding approximately twice as much. And it sees modest growth in corporate profits: not from the UK economy, which it expects to remain sluggish, but from overseas markets such as the BRICs. It therefore expects investors to shift allocations into equities for their better yield and earnings prospects.
It's a 'top-down' forecast based on economics and, whatever the actual numbers, is a plausible argument that the FTSE 100 will enjoy another year of good growth. Barring the US falling off a fiscal cliff, a meltdown in the eurozone, or some other Black Swan/Grey Swan/end of the Mayan calendar cataclysmic event, I'm inclined to believe it.
Concentrated
But one of the remarkable things about the FTSE 100 is just how concentrated it is. Just three sectors -- oil and gas, financials and mining -- make up half the index. And the top four shares, HSBC (LSE: HSBA), BP (LSE: BP), the two share classes of Royal Dutch Shell (LSE: RDSB) and Vodafone (LSE: VOD) make up over a quarter.
So the prospects for those four companies and three sectors will give a pretty good steer to what the index does. It's a 'bottom-up' way of looking at the FTSE 100.
Slow-burn
With its sprawling international operations, HSBC is something of a proxy for the global economy, skewed towards the developing markets of Asia and Latin America. That should give it long-term, slow-burn growth, while its diversity cushions downside risk. The bank was relatively resilient in the financial crisis, and is a good long-term hold.
The rest of the banking sector -- especially Lloyds, RBS and Barclays -- are more geared to the UK, Europe and the US. There's a good chance they'll enjoy a strong year with the two state-owned banks in particular making progress in clearing out their balance sheets and turning around their performance. However, all of them are vulnerable to a eurozone blow-up.
Oilers
Shell is a good, diversified play on the sector but its big investment in US shale gas, where the exploration glut has depressed prices, will weigh on its performance. Still, on a price-to-earnings ratio of under 9, it's a great share to hold.
BP is far the more adventurous, and risky, share. With hopefully litigation in the US out the way in early 2013, its shares should gradually be re-rated by the market as its new big Russian play starts to deliver to the bottom line.
Vodafone is the most defensive of the four stocks that make up a quarter of the FTSE. Though its southern European operations have been suffering this year as cash-strapped Italians, Greeks and Portuguese pared back their spending, there is little doubt that mobile phones have become a basic necessity of life. Vodafone is generating a healthy cash flow, and it's hard to argue with a 6% yield.
Defensive
So defensive stocks are still where most of my money is going. I'm encouraged that Legal and General see more money going into equities and generally I'm bullish about the market. We'll know by the weekend if the end of the Mayan calendar heralds the end of the world (or if it's just another example of bad forecasting), and early 2013 should see some resolution of the US fiscal cliff.
But the eurozone debacle will hang around for the whole of next year, with the potential to wreak havoc on markets. So I am still biased towards stocks that would suffer relatively lightly.
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> Tony owns shares in HSBC, Shell and Vodafone but no other shares mentioned in this article. The Motley Fool has recommended shares in Vodafone.
