Goodbye the Nice economy, hello the Grim one. That's the view of the strategists at Morgan Stanley as they look ahead to 2010.
The Nice acronym was coined by the Bank of England a couple of years ago to describe the economic situation since its independence in 1997, and it stood for 'Non-Inflationary Constant Expansion.' Of course a lot has happened since then, including one severe financial crisis after another, the latest to unsettle investors' nerves being, of course, Dubai.
So - although he never mentions the D word - Morgan Stanley's Graham Secker has come up with a new moniker for the UK economy over the next few years:
As we look out at prospects for the domestic economy over the next five to ten years, we think Grim is a much better acronym, meaning 'Growth Really Is Mediocre'. In addition, we think grim is likely to be a fairly apt description of consumer sentiment as living standards are likely to fall, reflecting factors such as a weak jobs market; low real wage growth; higher taxes; higher inflation (weak pound means higher import prices); and less credit availability (which means lower spending power on the demand side and less consumer choice on the supply side).
And the ending of the Bank of England's stimulus programme, including quantitative easing, will also have an impact on sentiment, he said:
We think stocks can go higher in the near term and forecast 34% earnings growth in 2010. However, valuation is not compelling and we think sentiment around stimulus withdrawal is likely to weigh on stocks through the year. We set a December 2010 FTSE 100 target of 5000.
The key indicators that investors should follow next year, in our view, include: inflation expectations, interest rate expectations and bond yields, credit availability, earnings revisions, emerging market indicators and UK political opinion polls.The combination of a weak domestic economy and volatile markets suggests to us that the stocks that should do well in 2010 will be those that have high overseas exposure and/or a reliable growth profile and/or a reasonably good dividend yield that is secure and growing. Investors also need to think about the impact of a forthcoming tightening cycle, inflation and M&A.
On that basis the Morgan Stanley team like the look of the following stocks: BAE Systems, BAT, BP, Carnival, Cobham, Diageo, Legal & General, National Grid, PartyGaming and Vedanta.
