Business: What's In Store For 2016?

Predicting the future is fraught with difficulties especially when you have to contend with an EU referendum, a US election and an oil price that's showing little sign of recovery, but here we take a look at what the City is expecting in 2016.

Foreseeing the fortunes of the FTSE 100 isn’t easy , just ask the Telegraph's Ben Martin who tipped oil minnow Tullow to be the golden boy of 2015.

The gold rusted. The share price sank 59%.

Nevertheless, Ben, like many other analysts, economists and journalists has picked himself up, dusted himself off and composed himself for the latest question: Where will the FTSE 100 finish in 2016?

Given that Citi, one the world's largest investment banks got last year's prediction wrong by a margin of 1,400 points it's unsurprising that they weren't willing to comment on their forecast for this year.

Despite the reticence from the big banks there were plenty of market commentators willing to stake their reputation on what we should expect over the next 12 months.

Here we take a look at a handful of the issues on the business agenda in 2016.

:: Where will the FTSE finish 2016?

Market commentators are a lot less bullish than they were this time last year, with a Brexit referendum on the horizon and fallout from the interest rate rise in the US hard to gauge 2016 looks set to be a very interesting year indeed.

Panmure Gordon's David Buik predicts the index will close the year at just 6000, whilst Alastair McCaig at IG (LSE: IGG.L - news) is slightly more optimistic, pencilling in a modest 5.5% rise to 6,650.

:: What are the shares to watch?

The two sectors to keep your eye on in 2016 are housebuilders and miners.

They had mixed fortunes in 2015 with miners comprising the top three fallers of the FTSE 100, with Anglo American (LSE: AAL.L - news) shedding close to 75% of its value and Glencore (Xetra: A1JAGV - news) faring not much better.

Meanwhile the housebuilders enjoyed far better fortunes, Taylor Wimpey (LSE: TW.L - news) climbed nearly 55% while Berkeley was hot on its tail - rising by just shy of 50%.

Commenting on the likely fate of the beleaguered miners, IG's Alastair McCaig said "compared with a year ago, mining shares look much more attractive but cheap things tend to get cheaper".

Although he foresees consolidation saying: "We are also likely to see selective mergers in the sector."

The government’s buy-to-let tax relief reforms together with the introduction of the starter homes scheme will do little to remedy the supply side problem but instead of benefiting the housebuilders Mr McCaig argues that we could see a correction.

"The housebuilding sector is looking overvalued and higher price-to-book values suggest the good times are over but we may see share prices rise further in 2016 although it’s a sector where stock picking is important.

"Premium housebuilders such as Barratt and Berkeley Group look less attractive than Taylor Wimpey and Persimmon (Other OTC: PSMMF - news) ."

:: Will my house go up in value?

According to Savills (Other OTC: SVLPF - news) house prices are likely to rise by 5% in 2016, marginally higher than the 4.5% growth recorded by the Nationwide Index in 2015.

According to Savills, UK house prices will rise 17% by the end of 2020, with slower growth of 15.3% in London “where affordability is already stretched” according to Savills’ Lucian Cook.

Mr Buik is slightly more bullish for real estate, pencilling in a 6% rise for 2016, but he did caveat this by saying the interest rate trajectory could upset things.

:: So when will interest rates rise?

Now (NYSE: DNOW - news) that the Federal Reserve in the US has pulled the trigger all eyes will be on Mark Carney and the Bank of England.

The futures markets aren’t pricing in a rise until the end of 2016, with many economists not expecting the Bank to act before the EU referendum which is expected in June or September.

With (Other OTC: WWTH - news) over half of UK mortgages having a tracking or variable element any tweaks to UK rates are likely to have a far greater impact than they do across the pond where mortgage rates are often fixed for the entire length of the loan.

:: Will the UK leave the EU?

Betting exchange Betfair has seen nearly a quarter of a million pounds traded on its EU Membership Referendum market with the implied probability of an exit calculated at around 36%.

Although the ramifications of an exit are unknown many experts believe the fall-out risk is overplayed and that London and the UK will retain its position as a key trading partner with the EU irrespective of its membership position.

CMC’s chief market analyst, Michael Hewson, says “It (Other OTC: ITGL - news) is quite simply alarmist nonsense to state that calamity will befall a potential vote for Brexit, as it is in no-ones interest for a harmful schism to occur between the UK and Europe and the trading relationships between the two blocs.

"Trade partnerships will go on as before, as will currently existing commercial agreements."

Given Europe's problems right now and in the future it would be remarkably short-sighted of them if they chose to be difficult with one of their largest trading partners and export markets in the event of a "No" vote.

IG’s senior market analyst, Chris Beauchamp, was slightly more cautious: "The longer the debate (Brexit) goes on the more volatile markets are likely to become.

"The Conservatives pledge a referendum before the end of 2017, but the business community want one much sooner to avoid uncertainty hanging over the economy."

:: Where’s oil heading?

Oil had a troubled 2015 slipping 35%, having halved the previous year.

Panmure's Colin Smith does not expect oil prices to rally significantly until the final quarter of 2016 when $55 a barrel is possible.

Meanwhile IG predict a continuation to the wider commodity crisis: "There is no end in sight to the commodity slump and returns on invested capital continue to fall, as capital costs rise."

However, given the VAT and duty imposed on petrol prices at the pump we are unlikely to see forecourt prices fall much lower. Even (Taiwan OTC: 6436.TWO - news) if Brent crude prices fall to zero - petrol would still be 75p a litre.

:: What will happen to sterling?

American holidays are likely to get a lot more expensive. Analysts at Deutsche bank (Other OTC: DBAGF - news) believe the pound could fall as low as $1.27 in 2016 and $1.15 in 2017, that would represent a 40% reduction to the value of the pound.

With the Fed expected to raise rates four times in 2016, and the associated uncertainty of the UK's future in the EU, Deutsche's prediction could prove to be a smart one.

That said, Credit Agricole (Swiss: ACA.SW - news) 's foreign-exchange strategist, Manuel Oliveri, says that the pound has the greatest upside potential of all the major global currencies.

"Once the referendum uncertainty dissipates, the capital-flow situation will be positive again."

The November presidential election in the US could also dampen dollar appetite, especially if Donald Trump's implied chance of success increases from its current level of 10%.