Five micro-themes that could move the markets in 2006

published 18 January 2006

The future is an impossible place. Every year the world's financial pundits have a go at forecasting it and pretty much every year they are wrong. Indeed, if they had any sense they'd have given up long ago. Still, they haven't, and no one appears to mind much if they keep getting it wrong the financial commentary market seems to be a remarkably forgiving place. With this in mind, we've asked some of our writers and some of our favourite analysts to tell us what they think might happen during 2006...

There's been plenty of commentary, both in MoneyWeek and in the rest of the press, on the big themes for the year ahead. But what of the more micro matters that might move the market? Here are five smaller themes for investors to keep an eye on.

Real estate investment trusts

Originally expected to be launched in the summer, real estate investment trusts (Reits) tax-efficient vehicles for pooled investment in residential and commercial property will now not be available until January 2007 at the earliest. However, they are still likely to be a big talking point in 2006, with major implications for the property sector. But not in a good way. So paranoid are the Treasury and Revenue & Customs about the possible loss of tax from the new Reits structures that they may have created a new vehicle that no one will use, says Anthony Hilton in the Evening Standard. For the past year or more, almost everyone in finance has been hyping property shares in anticipation of the benefits to come. Now, thanks to Gordon's fiddling, these benefits are now seen by those in the know to be "non-existent" (though the details of the tax regime will not be published until the spring Budget). This means that the entire property sector is probably "10% to 15% overvalued". Watch for it to start falling.

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The World Cup

Every four years the football jamboree is a honeypot for sponsors, equipment providers and almost everyone else with anything to do with the event thanks to the relentless global coverage it gets. So how can investors benefit? One way might be to look to shares in sporting equipment makers, such as Germany's Adidas-Salomon (which says it has already reached the sales target for its licensed 2006 football World Cup products), or UK sporting goods manufacturer Umbro. But neither is cheap, so we think that investors may do better to cash in on the interest in football by buying into a football club such as Newcastle United. The club is doing better than it was, but its shares are still way off their highs and offer a yield of over 7%, making it a possible takeover target.

Civil partnerships

With the first UK ceremonies having now taken place, the civil partnership ball is well and truly rolling. And the wedding industry is desperate to get a slice of the cake. It's no surprise, of course: amid a grim spending environment, the pink pound is the holy grail for retailers, and with Elton John and partner David Furnish spending £100,000 on their stag night alone recently, the potential for profit looks obvious. Lawyers and party planners will make money, as will hotels and caterers but it is not yet clear how investors might gain. The big chains will make only marginal gains from the new-style celebrations relative to their overall profits and it isn't yet clear which of the smaller retailers could do well from them. Nevertheless, with a market of this size to play for, it is an area worth watching closely. Investors can expect investment candidates to come to the fore as 2006 unfolds.

Handbags in Russia

We have all got used to the high oil price this year as the cost of petrol has at times flirted with the £1 per litre mark. And most people are aware that one of the most important reasons for this is the tremendous rate of growth in some of the fast industrialising economies such as China, Russia and India. But rather than buying this growth through the price of oil or other commodities, an equally profitable way of playing the theme might be to look at the pick-up in consumption in these countries as their economies grow. There is currently huge demand for exclusive designer clothes in Russia and other former Communist countries, says Charlotte Edwardes in The Daily Telegraph. It used to be that most of the world's luxury goods were hoovered up by the Japanese. Now they've got serious competition.To get exposure to the growth in demand for handbags, shares in luxury goods group LVMH are well worth owning.

Mergers and acquisitions (M&A)

Takeovers of listed firms took off in 2005. Indeed, even the London Stock Exchange is currently locked in a bid battle. And thanks to the UK's low interest rates but high corporate cash flows, it looks as though 2006 will offer more of the same. In banking, Abbey National's recent takeover by Banco Santander is not likely to be the last in the sector, with a wave of M&A expected in the next few years. Up to 700 European banks are likely to be taken over in the next four years alone, says Nick Goodway in the Evening Standard. This will lead to the creation of a handful of pan-European "mega-banks" by 2010, according to financial services group Deloitte. In the UK, the relatively weak high-street bank Lloyds is hotly fancied by many to end up in the arms of a suitor.

Elsewhere, port operators have had a bonanza in 2005 due to the world trade boom and consequently there have been some high-profile takeovers in the sector. The latest rumoured target is Forth Ports, whose business is currently booming. Trading at around 22 times forecast earnings with a prospective yield of 2.7%, bid speculation has made the shares very pricey, says Dominic White in The Daily Telegraph, and there is no certainty an offer will emerge. Even so, the shares are "worth holding". Mergers and acquisitions should provide a further boost to equities in 2006, says Andrew Johnson in the Daily Express. Eight companies with strong fundamentals where there is "compelling reason" to think they could be ripe for takeover are Kingfisher, Man Group, Prudential, Alliance & Leicester, Standard Chartered, Intercontinental Hotels Group, Cadbury Schweppes and Centrica.