2010 has been a strange year. We've seen two Western economies go bust yet many investments are finishing the year on a high note. What does 2011 hold in store?.
2010 has been a year of very mixed fortunes. We've seen the Greek and Irish economies run out of cash (or, more accurately, the ability to continue borrowing at a reasonable price), requiring expensive bailouts from neighbours. Yet most stockmarkets and commodities have finished the year strongly - albeit with a rough ride along the way.
But in many ways the global outlook is little unchanged from a year ago. Western economies are stagnated and have heavy debts, necessitating tax rises and spending cuts. While emerging economies continue to prosper, with growing domestic demand helping to offset falls in exports to cash-strapped Westerners.
There's little doubt that the gazillions of dollars pumped into the US economy by the Federal Reserve have helped markets, but we mustn't forget this is a last ditch attempt to get the US economy firing on all cylinders again and far from guaranteed to work.
Perhaps the saving grace has been low interest rates. If you've kept your job and have a variable rate mortgage then chances are you're better off than ever, thanks to low mortgage payments.
Anyway, here are my views on what happened in 2010 and what might happen in 2011.
Savings
2010 |
2011 |
The Bank of England Base Rate has been rooted at 0.5% all year. Bad news if you have a variable rate savings account - around 1/3rd of which now pay 0.1% or less a year, although 'best buy' variable accounts have remained around 2.5 - 3%. Fixed rates have fallen slightly, with the highest 5 year rates nudging back from about 5% to 4.5%. Rising inflation has been a big problem, leaving most savers worse off in real terms. But a rise in the FSCS safety net from £50,000 to £85,000 is good news. |
Our economy remains on the brink of recession, providing a big disincentive for the Bank of England to raise interest rates. I'd therefore expect variable savings rates to stay more or less where they are. Fixed rates might improve if economic prospects pick up, as that increases the likelihood of future Bank of England interest rate rises. Inflation could remain a problem, though it might subside later in the year. |
Mortgages
2010 |
2011 |
Flat interest rates have meant little change to variable rate mortgages, with standard rates averaging about 4%. But while cheap, banks continued reluctance to lend and an uncertain housing market have meant few new mortgages being taken out. The best rates still require a deposit or equity of 20% - 40% of the property value, with the rates for a 10% deposit being around double - no change on 2008. |
Rates are unlikely to change that much, as per savings. Lenders remain very cautious, but provided the economy continues to stabilise and bad debts don’t rise then we may start to see a reduction in the deposit or equity required to get a competitive rate by the end of the year. If you’re paying your lender’s standard variable rate then consider re-mortgaging to a lower rate now! |
Stockmarkets
2010 |
2011 |
Stockmarkets have been up and down like a yo-yo, generally overreacting to any news, good or bad. They've finished the year strongly, seemingly due to improved global economic optimism and the US announcing a further $1 trillion injection into its economy. Depending on where you invested, the UK stockmarket generally rose about 10-30% and emerging markets 20%+. Dividends also continued to look positive, with more companies ether resuming or increasing their payouts to shareholders. |
The rise towards the end of 2010 has surprised me and may not be sustainable unless we see more positive economic news in 2011 - far from certain. Nevertheless, dividends continue to look appealing versus other investments and the longer term prospects for emerging markets remain very convincing. I'd continue to favour well established companies that pay attractive dividends over anything too racy and consider the few 'absolute return' style funds that actually appear to work. |
Gilts & Corporate Bonds
2010 |
2011 |
With the exception of Greece and Ireland, safer government and corporate bonds have had a fairly subdued year, returning around 5-6% in the UK. Higher yielding bonds have done better at around 12%+ thanks to increased confidence in those companies' financial health. The benefit of low interest rates has been offset by rising inflation, driven mostly by higher oil prices. |
Interest rates will likely remain low and provided oil prices don't surge then inflation should fall later in the year. Both are helpful to bonds, especially government and blue-chip corporate. However, if economies struggle then so might companies, which could hurt confidence hence bond prices. I wouldn't be surprised if 2011 returns are similar to 2010, although higher yield bonds could suffer if stockmarkets tumble. |
House Prices
2010 |
2011 |
Prices rose over the first half of the year due to nice property being in very short supply. This encouraged plenty of others to put their homes on the market, but generally at unrealistic prices which has led to the market stagnating. The rental market has picked up as a result. |
House prices will very likely fall, perhaps by 10-20% over the next few years, but it'll be a gradual process. Buyers will want to factor this in to their offers, but as there are few serious sellers willing to oblige house sale volumes could fall further. |
Commercial Property
2010 |
2011 |
Returns have been reasonable over the year, with prices recovering slightly and rental income stabilising. UK returns have been around 14% (about half income & half growth) and better still in some overseas markets. Industrial property has lagged retail and office, with London still the main driver for the latter. |
Rental yields of around 6% continue to look attractive versus other investments, which should keep demand buoyant. However, as commercial property is so dependent on the economy prices and rents could suffer if the UK economy falters. I expect returns to be lower than 2010, but a significant drop is unlikely. |
Gold
2010 |
2011 |
Started the year at $1,100 per ounce, which seemed high, but continued soaring to over $1,400 before falling back to around $1,350. High prices have been driven by investors seeking a safe haven during turbulent markets. |
Despite the high current price I expect it to be fairly stable over 2011 unless stockmarkets and economies perform far better than expected, in which case some investors may sell-off their gold piles. When investor demand does eventually wane prices will probably fall, but I think longer term prospects are still reasonable thanks to growing demand from emerging economies such as India and China where increased prosperity should increase demand for gold jewellery. |
Oil
2010 |
2011 |
The price per barrel has risen from about $78 at the start of the year to over $90 in December. This suggests demand picked up thanks to improving economic fortunes, but rising costs haven't helped global inflation which has been a thorn in the side of some economies. |
The oil price is very sensitive to economic news, making predictions difficult. I think the price will likely remain more or less where it is, with the possibility of a small fall if economic news worsens. However, longer term prices will invariably rise as more of the world's developing population starts driving motor cars. |
Tax
2010 |
2011 |
The UK Government's colossal deficit meant lots of tax rise announcements. VAT rose from 15% to 17.5% on 1 Jan, a new 50% top rate of income tax was introduced in April and child trust funds scrapped from the end of the year, but the worst rises were deferred until 2011 and beyond. |
VAT increases from 17.5% to 20% from 1 January and National Insurance contributions, both employer and employee will rise by 1% from April. The annual allowance for tax relief on pension contributions will fall from £255,000 to £50,000, also from April. Expect more future tax rise announcements if the Government struggles to meet its debt reduction targets. |
Have a great festive season and (despite the above) let's hope for as prosperous New Year!
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