Writing year-ahead outlook reports and trying to pin point the stock market level at a specific point in time is a fairly futile exercise at the best of times.
So say Graham Secker and Charlotte Swing at Morgan Stanley in their UK strategy outlook. But everyone in the City will still give it their best shot in the coming weeks: speccy outlook reports are as readily available in the run-up to the festive season as mince pies and mulled wine.
The Morgan Stanley pair’s point is that this time round the crystal-ball gazers have even less chance than usual of being on the money. With high levels of uncertainty both in the financial system and around the macro-economy, their prognosis is summed up in their strapline: “Fat Tails, Lean Times.”
Their base case scenario is that equity markets will end next year close to current levels, as the credit crisis starts to have a “significant detrimental effect” on economic growth, in particular via curtailed lending by the banks. Their FTSE 100 target for next December is 6,300. Risks are to the downside and Secker and Swing’s bear case is a target of 5350, or a fall of about 16 per cent from current levels - a scenario to which they ascribe a 35 per cent probability, versus a 20 per cent likelihood of their 7,500 bull case.
Lower rates, they add, may not be much help given the “excess gearing” already in some sections of the economy. In reality, they say:
households and banks have all been guilty of stretching the elasticity of their balance sheets — in effect, betting on the absence of an economic cycle. While economic downturns usually follow periods of excess, the fact that so many constituents of the economy have such stretched balance sheets does not augur well — households will not want to take on more debt, banks need to curtail traditional lending activities due to their low capitalisation levels, and the stretched nature of government finances means that it is severely hampered in its ability to provide the traditional automatic fiscal stabilizers in the event of a downturn.
Given the inherent difficulties, it would perhaps be unfair to pull out last year’s report from the pair. But instructive. So here it is.
In November 2006, it was a call of ‘more of the same’ from the Morgan Stanley house, with a call for the FTSE to end 2007 at 6,550 with risks to the upside and a bull-case of 6,930. The report cited a benign macro outlook, and was based on a predicted re-rating for equities as investor started to factor in another two to three years of growth following the mid-cycle slowdown.
The perils of forecasting laid bare. John Plender in a rather prescient column in the FT on January 1, 2007 commented, “I have no doubt that risk aversion will stage a comeback at some point in 2007.”
He added:
When it comes to the timing of financial crises, Plender’s first law of forecasting is, never put a figure and a date in one and the same prediction. Another prudent approach is to spread one’s bets, as Mark Twain did when he said: “October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”
