Analysts are forecasting that the FTSE 100 index of shares will hit a new high of 7,000, signalling a surge in returns for investors.
Richard Buxton, a top-rated fund manager for Schroders, said he believes the index of Britain’s leading shares could rise 25 per cent in the next 12 months.
That would take the FTSE above the peak of 6,930 it reached on December 31, 1999, during the tech boom. The index was opening today at 5,745.
Mr Buxton predicts share prices to pick up in 2011 as investors believe the state of the economy is not as bad as feared – despite the VAT rise to 20 per cent hitting retailers and job losses in the public sector.
He said: “It is a paradox the worst recession of a generation has made the UK one of a most attractive area for investors.
“Having shed jobs quickly at the beginning of the recession, companies are leaner. I expect us to muddle through with sluggish growth but I certainly don’t see the UK in negative territory.”
His view was reflected in recent optimistic forecasts by leading financiers. Deutsche Bank believes the FTSE 100 will end 2011 at 6,880, Citigroup predict 6,750 while UBS has a forecast of 6,700.
Nick Nelson, strategist at UBS, said: “The UK is one of our preferred countries in Europe, given that it has less direct exposure to the eurozone debt crisis, and a flexible exchange rate and monetary policy.”
But the British Chambers of Commerce warned that the wider economy was due to face a difficult year and downgraded its forecast for the UK’s GDP growth in 2011 to 1.9 per cent from the 2.2 per cent in its September prediction.
Yet the BCC believes the UK’s economy is sufficiently robust to avoid another recession.
It claims inflation is likely to remain above three per cent for the whole of next year. But the Bank of England is likely to hold interest rates at 0.5 per cent until the second half of 2011.