Analysts are predicting that the stock market will rise by some 10% next year. No surprise there – they make the same prediction every year.
So the outlook seems good, but for sure there will be some bumps along the way. Here the pitfalls that you need to beware of in 2011.
Don’t be fooled by low interest rates.
‘Now that interest rates are so low,’ asked syrupy BBC Moneybox presenter Paul Lewis, ‘is it time to be getting back into shares?’ A pity you did not think of that last year, Paul! Anyway, it is true that the yield on shares compares favourably with the measly deposit rates offered by banks. But that does not necessarily mean that shares are cheap. In fact it is bank deposits that are ‘expensive.’ Interest rates are unsustainably low and once they go back to a normal level the argument in favour of shares will suffer.
Watch China
2010 has been a wonderful year for the natural resources sector. Just arrive in the City carrying a pick and shovel and investors will throw money at you. If the price of oil and metals stays high then natural resource companies will make big profits. But this is dependant upon Chinese demand. Will it be sustained? It is hard to know what is going on in China, but if China sneezes then mining and energy shares the world over will catch an almighty cold.
Don’t Ignore Political Risk
In their stampede to invest in new mining and energy ventures, investors have been all too ready to turn a blind eye to political risk. To take just one example of what can happen, in May AIM-listed Rurelec saw its 50% stake in a Bolivian power generating business nationalised by a government previously thought to be friendly to British interests. From Zimbabwe to Uzbekistan numerous countries have an unstable political leadership that poses a threat to foreign business interests. Investors ignore this at their peril.
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Beware New Issues
One of the refreshing features on 2010 has been the dismal performance of many new issues. Booby prize must go to fund management group Gartmore that sold its shares to investors at 220p just a year ago, lost their star fund manager and now see their shares languish below £1. Other notable flops have been home delivery grocer Ocado Group (-15%) and interactive learning specialist, Promethean World (-70%). Tired of being asked to deliver easy profits into the hands of private equity and buy-out specialists City fund managers have been digging in their heels. 2011 is likely to see a rising tide of new issues – but they won’t all make money for investors.
Keep an Eye on Sterling
Now that the UK has a government which thinks that, by and large, it is not a good idea to spend money you have not got, the pound has been rising. With the Euro area in disarray and the USA running up an ever increasing pile of debt with absolutely no plan for tackling it, there is every chance that Sterling will continue to appreciate. Our coalition government has all the right instincts, foreign investors recognise this fact, and we are being rewarded with borrowing costs and an appreciating currency. This is great news – but remember that this reduces the Sterling value of profits made overseas by UK-quoted companies.
Watch Out For Cash Raising
Hardly a day passes now without the announcement of a capital raising exercise through the issue of new shares. Investors are being asked to stump up the cash, especially for mining and oil exploration ventures. This is what stock markets are for, and natural resource ventures require huge amounts of cash before anything can be produced. But there must be a lot of mining and oil industry executives crossing their fingers that this appetite for new equity in the sector stays strong into the New Year. Sentiment can switch very quickly. The tap is now on – but any form of global shock could see it shut off, wrecking corporate investment plans.
And Finally…
And finally, a few warnings that apply not just to 2011. Watch out for the absurdly high charges of fund managers, especially hedge funds, and vow that you will not pay them.
Don’t take too much notice of the message boards which are a perfect vehicle for the unscrupulous share-pushers.
And don’t, please, ever agree to invest in a proposition made to you by a cold caller over the telephone. We have seen plenty of scams in 2010. Don’t let yourself be a victim!
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
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