My five financial predictions for the New Year

Mark Twain allegedly observed that “prediction is difficult – particularly when it involves the future”. The origin of the quote is disputed, but what is not in dispute is the sentiment, for making predictions about financial markets is a sure-fire way of making a fool of yourself.  

Yet we all do it. The City forecasters do it professionally, and the rest of us do it implicitly. Anyone making a decision about buying or selling a house is making some sort of assumption about how house prices and interest rates will move. Anyone who changes job is taking a view on the security or otherwise of their new employer’s business. Even a simple decision on whether to buy currency for a foreign holiday money early means you are making an exchange rate forecast.

So the usefulness of forecasts is not so much to say what will happen, for no one can know. Rather it is to set out a template into which people can fit their own ideas, and make their own judgements. In that spirit here are five of mine for 2021:

One. Sterling will get much stronger, reaching $1.50 (£1.09). This is partly a response to the Brexit trade deal, a sense of relief that the chaos has averted. But it will equally be a wider reassessment by global fund managers of the attractiveness of UK investments. On the eve of the Brexit referendum in 2016, the pound was trading at $1.49. So it is not outlandish to think it will go back there, particularly since there is a general feeling in the markets that the dollar is overvalued.  

Two. The reassessment of UK assets will lift the FT100 index to a new all-time peak. This reassessment will not happen suddenly, for that is not the way markets usually work. Currently, most share markets are at or near their highs, but UK shares have lagged behind. But the fact that by global standards their performance has been lamentable means that they offer value. 

Its current dividend yield is around 4 per cent. The S&P500 index yields around 1.6 per cent. You can argue that the US economy has better prospects than the UK, but this level of divergence is remarkable. Put at its lowest, UK shares do not have to do very well to outperform US markets.

Three. I fear there will be sharp falls in US high-tech stocks. To suggest that is contentious. No one likes a bear, and those companies – Amazon, Apple, Google and so on – are wonderful enterprises and will continue to be so. But the political winds are starting to blow against them, and while I can’t see calls for them to be broken up succeeding, these headwinds will lead to a rethink about their value. There is a bubble and bubbles pop. Tesla is worth more than the nine largest car makers combined. That cannot be right.  

Four. The UK and the US will both grow faster in the coming year than the Eurozone. The principal reason for thinking this will be the faster rollout of vaccines, with the UK having a two-to-three month lead over Europe, and maybe a lead over the US. It has become quite clear that a sustained economic recovery is impossible until a majority of the population has been vaccinated. Once that has happened the brakes are off. I don’t know whether there will be a “roaring Twenties” boom as there was after the First World War and the Spanish flu, but the second half of this year is going to see a mini-boom. 

So the question really is how soon the different parts of the world economy get back to the peak at the end of last year? I suggest (and this is much more optimistic than current official forecasts) that the UK will be pretty much there by the end of 2021.  

Five. The prospect for UK house prices is much less bullish. My prediction is that overall they will end up lower at the end of this coming year than they are now. There won’t be a crash; just a subdued market, held back by the realisation that relative to incomes they are, in much of the country, simply too high. On a long view, they will be supported by a rising population and demand for more living space. But short term, expect a pause – which in social terms would be no bad thing.