Year end predictions were full of fear. As investors, we should rejoice.
It is the beginning of a new year. Traditionally this makes it time to take stock and peer into the future trying to predict what may happen.
Accurate prediction of the stock market is, of course, impossible. Nevertheless commentators of all sorts try. Those writing in the newspapers leading up to the end of last year seemed to be expressing an overwhelming sentiment of gloom. Here are three of their reasons to be fearful for the coming year:
Reason 1: Consumers are over-indebted.
Levels of personal debt have soared. This has led to warnings about rises in personal bankruptcies and home repossessions. Recently, HSBC
(LSE: HSBC)
said in their trading update of 5th December:
"The trend of rising personal bankruptcies and IVAs seen since the second half of 2005 looks unlikely to abate in the medium term and continues to be the major influence on loan impairment charges in personal loans and credit cards."
This gives rise to worries about the profitability of banks and retailers. If such worries are well founded, it would suggest that shares in debt management services like Debt Matters
(LSE: DEBT)
, Debt Free Direct
(LSE: DFD)
, or Debts.co.uk
(LSE: DETS)
will do well.
Reason 2: Property prices may fall
Because property prices have risen so much over the last few years, many fear that they are due for a dramatic fall. This makes the market fear for the profitability of financial institutions, house builders and property companies. For example, Paragon
(LSE: PAG)
, the specialist buy-to-let mortgage company, is on a price-earnings ratio of only 11.3 and yielding 3.1%. On the other hand shares in house builder Wilson Bowden
(LSE: WLB)
have soared because three companies are trying to take it over.
A fact that suggests this doomsday property scenario may not play out is that 3i
(LSE: III)
, the investment group, is backing the purchase of Countrywide
(LSE: CWD)
a chain of estate agents. Surely, this shows 3i doesn't think that the property market will crash.
Reason 3: The current M&A boom may not last
We've enjoyed cheap credit and low interest rates for many years now, this has not only helped consumers borrow, but also companies and hedge funds. In turn, this has encouraged M&A (mergers and acquisitions) activity which has pushed many share prices higher.
There is some evidence that the boom in M&A activity is peaking. One City analyst has opined that the take-over battles for Corus
(LSE: CS)
and the London Stock Exchange
(LSE: LSE)
show that the M&A boom is coming to an end -- the prices being offered are too high especially when the steel market is cyclical and the profitability of stock exchanges may fall as globalisation and competition put fees under pressure.
A Reason to Be Cheerful
Many seasoned investors believe that instead of trying to predict which companies and shares might do well, it is better to concentrate on those that are least likely to do badly. These are often the very ones that others are fearful about. Hence, those sectors and companies that are being avoided by others are where we should be looking to put our money. Obviously, this includes banks, retailers, financial institutions and property companies.
There are, therefore, no reasons to be fearful, but rather reasons to be cheerful; the New Year may offer some rich investment pickings.
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