Where now for the stock market?

Times Money asked a number of experts how low they thought the market could go this year and whether investors should buy, sell or hold their UK stocks. All of them expected the market to move lower in the next few months, although most expected a rapid bounce back after that.

They rated the UK market a cautious hold, with one suggesting profit-taking if the market went much higher, while others argued for buying on the dips.

Richard Philbin, an independent investment strategist who has worked for several fund groups, including F&C and AXA, says that the short-term outlook in the UK continues to look pretty gloomy. “There remains a lot of uncertainty about the UK economy, and that could drag the market down a bit more in the next few months. However, the UK economy is a very different thing from the UK stock market, which is much more focused on the global economy. The companies in the FTSE 100 index derive about 75 per cent of their earnings from overseas so are not too heavily affected by sluggish UK growth.

“In fact, most large UK companies are doing pretty well at the moment. They have plenty of cash in their balance sheets and the current weakness of sterling means their exports look very attractive.”

He reckons that the FTSE 100 is likely to find a floor at about 5,550. Assuming that corporate profits remain strong, he expects the market to bounce back through 6,000 and beyond in the coming 12 months One of the so-far-unheralded drivers of this recovery could be a resurgence in the banking sector, he says. “The banks have already paid back about £135 billion of the £185 billion it cost to bail them out and next year they could clear the remaining balance. When they do they will become a lot more profitable very rapidly and could give investors a big surprise.”

Right now, he says, there are better places than the UK to put your money, so he would hold fire for the time being. But he urges investors to be ready to put more money into the UK market in anticipation of an improved showing next year.

John Hatherly, of Seven Investment Management, the wealth manager, is rather more pessimistic over the short term. He thinks that the stock market, which has fallen by about 8 per cent since its May high, could tumble as low as 5,000 if the expected global pick-up does not happen in the second half of the year. One of the reasons for this, he argues, is that the second round of quantitative easing (QE2), which injected large amounts of money into assets such as shares, came to an end this week. Without that additional boost, share prices could sink lower.

However, he believes that, at the 5,000 level, share prices would be supported by the cheap valuations on which most stocks stand. He says: “I would hold steady for the moment and buy on the dips.”

Tom Becket, investment strategist at PSigma, the fund manager, is another who thinks that the market is likely to edge downwards in the next few months but he doesn’t expect the FTSE 100 index to fall below about 5,500. One thing that should prevent share prices from falling too far, he says, is that there is a lot of cash still sloshing around the system. He says: “This money seeking a home could trigger a short-term bounceback in the FTSE to as much as 6,500 by Christmas.”

But he is much less positive about 2012. “Any Christmas bounceback could be a false dawn and I think 2012 could be a tough year.”

He argues that there is still too much debt in the system, company managements are reluctant to plough money into their businesses and investors are much less tolerant of risk than they used to be.

“Investors are nervous, they are reacting very swiftly to any bad news, and there could be a lot of bad news in 2012.”

He adds: “If the FTSE 100 gets close to 6,500 I would be tempted to take profits.”

Jeremy Batstone-Carr, of Charles Stanley, the stockbroker, thinks that investors could be in for a rocky ride this year and next. While he expects the FTSE 100 to end 2011 at 6,150, he thinks that the journey could be pretty bumpy along the way: “It’s a tug-of-war between a relatively positive outlook at company level and a series of headwinds at global level. Company profits are expected to grow by between 15 per cent and 20 per cent this year, which would make shares in the UK stock market look very cheap by historical standards.”

But pulling in the opposite direction, he says, are wider concerns, such as the danger of eurozone countries, led by Greece, defaulting on their debts. Also, the economic data coming out of China suggests that it is experiencing much weaker growth than in recent years, with a serious knock-on effect for global growth.

Mr Batstone-Carr says: “If Greece defaults we would have another financial crisis on our hands and the FTSE could fall back to its 2010 low of 4,800 and might even go lower than that.”

He doesn’t see things getting any easier in 2012. “It’s likely to be a difficult year. Austerity is going to be the name of the game and we can’t expect much pump-priming from the Government. It will be up to the corporate sector to invest, and there’s no guarantee that they will.”

He thinks that investors should continue to hold a stake in the UK market, but switch from cyclical stocks, such as mining, to defensive stocks, such as pharmaceuticals and utilities. He says: “In a difficult market you want to be defensively positioned so that as prices rise and fall you have the added consolation of knowing that your defensive stocks, which are generally high yielders, are paying decent dividends.”

He adds: “It’s definitely too soon to be investing more money in the UK stock market since there is unlikely to be much respite from the headwinds in 2012.”

How the FTSE 100 has changed

• F&C Investments this week published research on significant changes to the make-up of the FTSE 100 index since its launch in 1984, when it was, according to the group: “A roll-call of British ‘blue chip’ household names, from Boots and British Home Stores to P&O, Trusthouse Forte and United Biscuits.”

• Only 30 of the original 100 now remain in the index, with prominence now going to the likes of BHP Billiton, Anglo American and Xstrata, all of which feature in the top 20 — ahead of Tesco and all the high street banks, except HSBC.

• F&C’s analysis of the make-up of the index shows that at the end of May oil, gas and basic materials stocks together made up more than a third of the FTSE 100 (19.5 per cent and 14.3 per cent respectively). A decade ago, basic materials made up only 1.1 per cent of the index, though the oil and gas weighting was similar, at 18.4 per cent.

• Many of the largest companies in the index, including HSBC and BP, pay their dividends in dollars. F&C says that companies in the burgeoning oil and mining sectors operate almost entirely outside of the UK — often in emerging and frontier market areas, contrary to investor perceptions.