Predicting the year ahead, even though it is done by all the fund managers, and many other interested parties, is always difficult, and as many predictions will be wrong as will be right.  In putting together our opinions therefore, we look for the common themes and consensus views amongst the fund managers, and it is these that we summarise here.

UK and US Economies
Key to stock markets progress in 2008 will be the part that the central banks will play in preventing any recession.  Some would argue that interest rates have been too high for too long but the cycle of raising interest rates (in the UK) has only really just ended as the perceived threat of inflation seems to have abated.
 
The key to central bank action seems to involve the actions of the Fed in the US as they control 25% of the worlds GDP and even though we have seen a global decoupling of economies, there is little doubt that a US based recession will affect the world economy.
 
The US has further problems in the form of a housing market that is further into downturn following the sub-prime crisis, which is not yet over, peaking in early 2008 in terms of loan adjustments.  This is being countered by the policy makers to a certain extent by increasing loan periods for the worst hit but the general malaise in housing remains.  This has a multiplier effect on the other areas of consumer spending as it affects confidence and therefore spending patterns.
 
It is generally agreed that a period of rate cutting will take place in particular in the US but what is not quite so certain is the effect this will have.  All the central banks have come together to try to mitigate the effect of the credit crunch and have been pumping liquidity back into the financial markets (notably the Bank of England in its bid to save the Northern Rock).
 
We have not yet seen the easing of lending terms between the commercial sector banks and this is increasing uncertainty.  These institutions have kept rates (LIBOR in the UK) well above those set by central banks with spreads (the difference between the two rates) being some 1.3% even after the additional central bank funding injection.  This is very high as it is normally 0.3/0.4 %.

In the longer term (six months plus) it is argued by some that the easing of lending terms will become apparent and this will spur the economy onwards with the markets reacting more positively. Banks form a large part of the market in the UK and will clearly benefit from falling interest rates.

Equities
Many US based economists feel that their economy is overdue a recession and whilst a slowdown is inevitable, and arguably already happening, this slowdown will be countered quite aggressively by the central bank.
 
The result of all this on equities is short term uncertainty, but there is a clear theme from the more positive forecasters that once we are through the next downturn we could see a good return on equities in 2008.  Most agree that the favoured asset class is equities but this will be masked by a high of level of volatility giving rise to levels of uncertainty at various times.
 
A view put forward by Richard Buxton from Schroders is that whist we are running towards the end of a bull market we still have a reasonable period to go and conditions are such that equities could recover well in 2008 if the banking problems are eased.  Others are more cautious about the level of return likely but agree on equities as the best potential growth area. 

For the UK investor, in terms of equities, it may also make sense to look globally for part of the portfolio.  Many fund managers are predicting a devaluation of sterling over the next 12-18 months given the lowering of interest rates.  A more diversified global outlook would be beneficial on that basis.
 
Sectorally the Emerging Markets and Asia still look a strong longer term investment given the rising consumption and wealth generation in those areas plus factors like the Olympics in China which will give the area a boost. Earnings momentum is still strongest in this area although equity valuations are high compared to other major markets. 

Fixed Interest
The corporate bond arena does not look particularly exciting for 2008, with most predicting a similar year to 2007.
 
In terms of fixed interest investments, gilts and perhaps index linked gilts look more interesting depending on the direction of inflation – an upward trend in inflation may put forward index linked gilts as an attractive safety based option.
 
Interest rates clearly have a great impact in this area of the economy and it seems likely that the US and UK are likely to cut interest rates in 2008 but it also looks likely that Japan and the Eurozone will keep rates on hold – although this may change if the climate turns towards recession.
 
Property
Property has had a torrid time of late particularly investments in bricks and mortar.
 
This has led some investors to take money out of funds which despite having to be revalued downwards in capital terms are still being run well.

From a longer term perspective we may be coming to a point where its appropriate to start buying into commercial property again but it makes sense to look internationally as well as in the UK and to look not just at the bricks and mortar funds but at property securities as well.

All the furore about Real Estate Investment Trusts has died down – not surprising given the performance of these investments over these last year –  but again this a short term trend and we believe as part of an overall property portfolio they will strengthen over the next 18 months or so. 

Summary
So what does all this mean for 2008?  We believe that a degree of caution is needed.
 
We are positive about the action the central banks will take, the uncertainty surrounds the effects that this will have on the commercial banking sector. 
 
The central banks have moved away from attacking inflationary pressures and are focusing on the other part of their remit which is maintaining growth.  The UK economy is generally healthy and has for example just overtaken the US on an earnings per capita basis for the first time in four decades.  The US consumer has more pressures but has been resilient of late. How long this can continue is debatable but lower interest rates will help to ease personal cash flow.

At a corporate level, there is still some bad news on earnings to come over the next few reporting sessions and cyclical areas such as retailers will be hit by such news.  The effect of interest rate cuts will determine whether this is a short term effect or whether we can gain more positive momentum towards the mid to end of 2008.