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Investing outlook for 2007
By Hargreaves Lansdown
With the year entering the home straight, the FTSE100 appears to be comfortable around the 6,000 mark, which Hargreaves Lansdown predicted last year as its end 2006 level. Hargreaves Lansdown believes 2007 has the hallmarks of further growth for investors.
Resumption of M&A activity, strong corporate earnings and a wall of institutional cash on the sidelines waiting to be invested would all provide good reason for investors to get involved in 2007. Consumer confidence, whilst fragile, could be returning slowly, and there are hopes that this will be reflected in some strong Christmas performances.
Richard Hunter, Head of UK Equities at Hargreaves Lansdown Stockbrokers, comments:
"2006 has seen a mix of fortunes for the FTSE 100, not least during May's mini-meltdown, but if the index can remain around the psychologically important 6,000 level, investors could be in for a year-end rally and a prosperous 2007. Sectors that investors might watch for with interest are mining, as the inexorable demand for commodities continues, and media, as a further rash of consolidation seems ever more likely.
Our estimate for the end of 2007 is that the FTSE will be up at 7,000
Mr Hunter continues: "Investors looking for specific stocks might like to bear in mind the potential return to fashion of large cap stocks. With this in mind, BP remains a core holding despite its recent troubles, GlaxoSmithKline has a drug pipeline which still looks promising and RBS, up to now a serial underperformer in share price terms, has merit."
- BP - 2006 has been something of an "annus horribilis" for BP. The Prudhoe Bay shutdown, threats of US litigation, strained Russian relations, the delay in the return of the Thunder Horse platform and the correction in the oil price have all weighed heavily on the shares. The silver lining is that BP remains an oil behemoth in global terms, and its strong cashflow can be matched by few of its competitors. Its sheer size in many ways enables it to withstand the current problems and the share price has found some support from its significant share buyback programme. Given the 9% dip in the share price over the last year, the general market view is to be picking the shares up on this weakness.
- GlaxoSmithKline - Unfortunately, GSK has disappointed on the fundamentals and the future of the business - delays and difficulties in relation to new developmental drugs has not been what investors have wanted to hear. The further weakness of the US Dollar and the outcome of the recent mid-term US elections also impacted the shares. That being said, recent news of the increased share buy-back programme will provide a technical boost to earnings. The overall pipeline does look promising, sales have made progress with growth in both the pharmaceuticals and healthcare products businesses, and the market consensus is favourable towards a currently unloved share whose price has drifted some 9% in the last three months.
- RBS - It remains a serial underperformer in the banking sector with the market worrying of "bid indigestion" (25 deals since 2000). However, the strength of its corporate banking arm and a concentration on loans to private equity houses bode well. Its exposure to UK personal bad debts is pedestrian compared to some of its rivals, and its cost income ratio is an impressive 42%. International diversification, exposure to the rampant Chinese economy through their stake in Bank of China, and a good income split in the UK between corporate and personal are all positive factors. According to market consensus, the shares are overdue a re-rating, with some in the market calling the current price of around 1850p as far as 2100p.
Sectors to watch
- Mining - The world's fastest growing economies, China and India, are showing little sign of their insatiable demand for commodities abating. This underlying demand has resulted in a phenomenal earnings stream for the sector and, despite the volatility of certain mining shares, the potential for future income remains. This cash surplus has led to a raft of extensive share buyback programmes and has facilitated consolidation within the sector, which may yet have further to go. Within the FTSE100, mining stocks account for nearly 10% by market capitalisation, so the importance of their performance next year will be felt on the wider market.
- Media stocks - This is a very fast moving sector. On the one hand, the convergence of technologies, or "quad play" - fixed and mobile telephony, broadband and the provision of TV - is changing the landscape for both traditional broadcasters and indeed telephone companies. There will be an ongoing scramble for dominance in this emerging market, just one example of which is the current ITV/BSkyB/NTL saga, which could go on for some time. The ever growing switch of advertising revenues towards the Internet will continue to play a part, as will the first signs of increased advertising spend from major corporates.
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