Monday, 10 January 2011

Predictions for 2011...

In my Money Week column I've been making some predictions for 2011. Here's a taster....

Predictions are ten a penny at this time of year. Just about every City economist and strategists has outlined their big themes of the coming twelve months. Tensions in the euro zone, rising inflation, a double dip recession and currency battles between China and the US have been exhaustively forecast.
But what makes a year interesting is not the trends that continue much as before, or the decisions that were relatively predictable. It is the stuff no one was expecting. Who would have guessed for example that BP would come close to being destroyed by an oil spill in the Gulf of Mexico during 2010, that Cadbury would be taken over or that both Greece and Ireland would go bust and put the euro in mortal danger?
So what might catch us out in 2011? Here are five surprises to watch out for?
One: The British economy comes storming back.
The UK is turning the corner faster than anyone could reasonably have expected. Growth keeps surprising everyone on the upside and unemployment hasn’t taken off in the way many feared. The coalition has proved remarkably durable, and has made a good start on getting the budget deficit under control – and, a few rioting students aside, the public have accepted austerity.
It may not last – but then again it might. In fact, there are encouraging signs of a recovery. The 30% devaluation of sterling in the wake of the credit crunch is reviving our withered manufacturing industry, and cutting into the massive trade deficit. The crisis in the euro zone has stopped the bond markets getting too worried about our own fiscal problems. Real wages are being cut – average earnings are rising by just 2.2% a year whilst inflation is running at 3.2% (and that’s the official figure – the real rate is far higher). That isn’t much fun for anyone, but there are few quicker ways to restore your competitiveness of your economy than cutting wages and devaluing your currency. It is too soon to be talking about an English Tiger, but there are signs the UK will do surprisingly well this year.
Two: Rupert Murdoch sells his British newspapers.
There is no evidence that the pay-wall for The Times and The Sunday Times has been the success that Murdoch must have been hoping for when he embarked on the experiment. News International claims 100,000 users, but it isn’t clear how many are paying full-price, or will stay with it. I haven’t met anyone who has subscribed, and I suspect you haven’t either.
Meanwhile the circulation of The Times continues to plummet. It is down to 466,000, down 17% on the year. The Sunday Times is stagnant whilst The Sun and The News of the World are also in decline. But the real problem for Murdoch is that he wants to take full control of BSkyB. It’s going to be hard for him to do that whilst he is also the country’s most powerful newspaper publisher. Too many competition issues are raised.
Is he really going to sacrifice the chance to get full control of a fantastic, growing business just so he can hang onto one that looks to be in irretrievable decline? It sounds unlikely. This is the year to get some money for the papers whilst they are still worth something.
Three: Jean-Claude Trichet’s term is extended at the European Central Bank.
The capable Frenchman is due to stand down in October from the world’s second most powerful central bank. The two leading candidates to succeed him are Mario Draghi, the governor of the Bank of Italy, and Axel Weber, the President of Germany’s Bundesbank.
Neither man is remotely suitable. Installing an Italian at the ECB’s Frankfurt headquarters would provoke riots in Hamburg and Munich. It might well be the decision that finally pushes Germany into quitting the euro – with Austria and the Netherlands close behind. But Weber wouldn’t be much better. He would be the hard money, austerity candidate, signalling years of German domination. Greece and Portugal might well decide there was no future for them in the euro.
What’s the EU to do? It could appoint and obscure central banker from Finland or Luxembourg. But that wouldn’t have much credibility. It would be far easier to extend Trichet’s term by two years until the euro is through the current crisis.
Four: The IPO market returns.
In 2011, there will be an upsurge in new listings. The private equity houses took over hundreds of companies at the height of the boom. With the credit markets unfreezing, and the equity markets doing well again, they will be looking to unload a lot of those businesses. They won’t be able to sell them to each other they way they used to, so they will have to list them instead. On top of that, governments will be looking to unload some of the banking shares they took control of during the credit crunch.
The net result will be an IPO bonanza. The investment banks will have so much stock to sell, they’ll need to tempt private investors into buying shares in new issues they way they used to. They’ll only be able to do that by offering them at a discount. Stagging – buying shares in IPOs and selling them within days – will be back.
Five: An African investment stampede.
On Christmas Eve, China invited South Africa to join the BRIC group of nations, making it the BRICS (Brazil, Russia, India, China and South Africa). That was an indication of how the continent is starting to join Asia and South America in rapidly modernising its economy. We tend to focus on the African disaster stories, but China in particular is pouring massive investment into the region’s wealthier countries, and growth is starting to pick-up. This will be the year when investors get bored with the other emerging markets and start looking to Africa instead.
Indeed, by the end of the year, South Africa, some of its neighbours and the UK may be among the best-performing economies – and that really will be a surprise.

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