The Year Ahead: Bulls and bears peer into the crystal ball

The blue-chip FTSE 100 index is expected to rise to around 4900 points in 2009, according to an average of forecasts compiled by The Independent.

This year has, in the words of one market strategist, been nothing less than "miserable", with UK equities clocking up their second worst year since the 1920s. The worst ever was 1974, with equities down by more than 50 per cent.

The UK benchmark, down more than 34 per cent – at 4216.59 – since the beginning of 2008, ranks a dismal 20th out of the world's 89 primary indices, according to Bloomberg data. Within the FTSE 100, the median share price fall has been over 30 per cent, with a number of stocks falling further.

The losses have forced a number of people to err on the side of caution in their attempts to work out where we might be in another 12 months' time. Cazenove, which predicted a trading range of up to 7000 points for 2008, remains among the optimists, with a target of 5000 points, an improvement on the current level of 4407, but still below where the market began this year. "As investors start to anticipate a recovery in profits in 2010, equity returns are, in our view, likely to strengthen over the balance of 2009," the broker said, recommending investors take positions in general retailers and housebuilders. "Within the market, we believe an improving household cash flow position will provide a backdrop against which consumer cyclicals, and cyclical stocks generally, will outperform the broader market."

The strategists at Credit Suisse, and Charles Luke at Aberdeen Asset Managers, are also targeting the 5000 points mark, while Gary Reynolds at Courtiers, the wealth manager, reckons the index may swing to 5500 next year.

JP Morgan has pitched its flag in the middle of the road with a target of 5100 points. "Bottom line, in 2007, when the environment was deemed to be perfect, no one was getting paid to be bullish on 2008," the broker said. "Today, with investor confidence at a record low, one does not get paid to be bearish on equities in 2009 and we advise buying stocks on dips."

But no one in our poll came close to UBS, whose analysts think that the index may rise to 5800 points, more than 37 per cent above the current level. "As bear markets go, this is up there with the worst of them. At its recent low, the FTSE [100] was down 44 per cent from its July 2007 level," the broker said. "As a result, valuations are now priced for disappointment."

The UBS target is based on the "less-than-outlandish" valuation multiple of 13 times to prospective earnings, assuming earnings decline by 15 per cent. "Even though trough multiples never correspond with trough earnings, based on 10 times multiple [the average since 1965 is 13.7 times] the FTSE 100 is pricing in more than 30 per cent decline in earnings to below 4000. Therefore, we maintain the view we initiated in early October, namely, that the market now offers value," the broker said.

For the bears, Sandy Chen, banking analyst at Panmure Gordon, leads the charge, predicting an almost 17 per cent slump to 3500 points. Morgan Stanley also expects another testing year and is aiming for a modest 4300 points. It does see a handful of opportunities, however, and expects the market to reward large cap companies with strong balance sheets with a combination of reliable growth prospects and/or high and secure dividend yields. "The two big investment decisions are when to see defensives and buy cyclicals and financials," the broker said, recommending a handful of stocks for 2009, including BP, Cadbury, Carnival, Autonomy and Vodafone.

Not everyone is dusting off the crystal ball. A number of traders declined to make a prediction, citing the mounting concerns about the world economy as we head into the new year. Many added that it was hard to make predictions about the index until uncertainties around forward earnings forecasts were resolved. John Kay, economist and author of The Long and Short of It investment guide, also declined an invitation to put forth his forecast for the FTSE 100. "If someone tells you what the level of the stock market will be a year from now, the only useful information they give you is that you should pay no attention to anything else they say," he said.