The Outlook For 2008

The current negative sentiment in the market has inevitably prompted talk of a recession, and news from America has continued to cast a dark shadow over the rest of the world.

It remains a possibility of course, but from a corporate point of view, the outlook is not as bleak as is currently perceived. Companies are still looking fairly lean; balance sheets are relatively robust, with cash to spare and no recent splurges leading to overcapacity. The real concerns all lie with the consumer, with over-indebtedness the greatest worry.

The next twelve months will be about finding companies which have robust business models that will be able to cope with the more difficult economic climate.

Smaller caps always suffer most from increased risk aversion among investors. However, there are still genuinely good dividend-yielding stocks to be found on the Alternative Investment Market, an excellent breeding ground for smaller company stories. These recovery plays carry different sorts of risk but they do bring genuine diversification to income portfolios, with above average dividend yields and, more importantly, potential for better capital and dividend growth over the cycle.

Popularity with investors inevitably brings its own pressures on fund managers, and after a relatively poor performance during 2007 income fund managers will need to show their mettle during the months ahead. Therefore, good stock picking skills will be vital in 2008.