In a recent FE Trustnet poll, 54 per cent of the 2,997 respondents said the FTSE would be higher than 7,000 points by the end of 2014.
Hargreave says that the index could well pass that marker, but warns investors could subsequently lose some of those gains. “To begin with [the year] will be good. The first week has been strong already,” Hargreave said.
The FE Alpha Manager says the economic environment is strong, especially for companies further down the market cap spectrum, because interest rates aren’t likely to rise in the next 12 months and the global economy is improving.
“The FTSE will be quite a lot higher than it is now during the year, but I think it will correct back to similar levels. It could easily go over 7,000 during the year, why not,” he said.
“But stock markets anticipate the future and at some point gains will come to an end. I will be optimistic for the early part of the year, but I will be tempted to re-organise my portfolio in the latter part.”
“I think there will be a correction. Other people are more optimistic and they think this rally can go on for another couple of years, but valuations, especially mid cap valuations, are quite high.”
However, Hargreave says the beauty of investing in small- and medium-sized companies is that there are so many to choose from, and in a good market environment like the one we are currently experiencing, stockpickers have much to gain.
David Jane, manager of the TM Darwin Multi-Asset fund, agrees the market will head in an upward direction in 2014, adding that it could even break the 7,200 barrier.
However, he warns that investors should prepare for more volatility. The market could fall quite considerably at some points during the year, he says.
“If you thought about a range, we could touch 6,200 again and we could also very comfortably touch 7,200,” he said. “Last year was pretty much an upward straight line. This year I think will be more volatile, but still generally upward. We’re in year-five of a 10-year bull run. Last year was a huge year. This year there is more risk of correction, but we won’t know until it is happening.”
The figure of 7,200 would smash the previous FTSE high of 6,950.6 achieved on 30 December 1999.
The blue chip index came close to this when it surpassed 6,800 points late last year, but markets have since pulled back, hovering around 6,725 points at the time of writing.
Jane (pictured) classes himself as “strongly bullish” about equities in the UK, but says he is less optimistic than he was a year ago, owing to the strong rally seen in 2013.
He expects the FTSE to end the year up roughly 10 per cent, trailing the 18.66 per cent gains the blue chip index saw in 2013.
Performance of index in 2013
Source: FE Analytics
The manager is also predicting stronger gains from Europe and Japan, where long-standing economic troubles have left valuations behind those of the UK and US. He expects to see more exciting growth from these regions.
“I think the UK has less exciting stuff going on actually,” he said.
Jane does add a caveat to his optimism, saying that in order for the bull run to continue, earnings have to rise as well.
The manager says that since the financial crisis, the majority of company gains have come through cost-cutting measures.
“But you can’t cut costs forever,” he continued. “Now we need economic growth. That is the bullish phase – strong economic outcomes with relative rising inflation and earnings growth. If that happens, the fact that valuations appear high will not be such a worry.”
Martin Cholwill, who runs the five crown-rated Royal London UK Equity Income fund and was recently named the most consistent fund manager in the IMA UK Equity Income sector over the last five years, is also bullish about prospects for the UK equity market in 2014.
However, he remains wary of macroeconomic risk factors which could cause periods of volatility in the UK market.
“As we look ahead to what 2014 may bring, I continue to believe that the US authorities will be determined to ensure that the economic recovery is well established before they try to wean the economy off the stimulus of QE, and with tapering well flagged, developed markets have taken the move in their stride,” he said.
“However, the main fallout risk is in those emerging market economies that fund their deficits externally and whose growth rates in recent years have benefited from the extremely cheap money that has resulted from QE.”
“My central view remains one of global economic ‘muddle through’, with anaemic growth in developed economies for some years to come,” he added.
Cholwill (pictured) adds that the UK markets will be batted about by political whims as the country enters an extended pre-election period, a factor investors should keep in mind for the year ahead.
“We have already seen energy prices in the UK becoming something of a political football and it is highly likely that more sectors will follow,” he said.
“I expect political risk to be an emerging theme as 2014 progresses and I do not feel it is currently priced into many stocks. Any business model dependent on government subsidies is potentially vulnerable to politicisation and I am therefore avoiding those stocks most at risk.”
In spite of the risks, Cholwill sees many opportunities in UK companies and expects markets to rise throughout the year.
