What will flow after big oil?

Forecasters said it was was going to go pear-shaped in 2004: the return of inflation, higher interest rates, a house price collapse, a dollar crisis, a sharp slowdown in China, not to mention grisly geopolitical shocks which would cripple the global financial system.

But they were wrong: share prices in Britain's top 100 companies rose by around 6 per cent - not as good as 2003, when they moved up 14 per cent after the toppling of Saddam Hussein, but in positive territory. However, investors could have earned nearly as much in a bank or building society.

Retailers had a reasonable year, ringing up an annual average gain of more than 10 per cent. Oil companies were next, with a return of 12.5 per cent - thanks to an oil price which at one point hovered close to $60 a barrel.

But it was tobacco groups, a sector long seen as a safe haven at a time of uncertainty, which came out on top with, an advance of 17.8 per cent. That is all the more surprising given the multi-billion dollar legal actions against cigarette manufacturers in the US and the clampdown on smoking in public places announced by the British government.

However, the concerns overshadowing the market at the end of 2003 are still in play today. Some of the events feared 12 months ago have come to pass: interest rates have risen and the housing market is coming off the boil; China is slowing down and the dollar is heading south. But it has all been relatively low key - no sign of investors stampeding for the doors marked exit.

Georgina Taylor, European equity strategist at broker Goldman Sachs, does not count herself among the pessimists. She says: 'Global growth is set to slow [in 2005] and there could be more volatility. Uncertainty surrounding the housing market in Britain acts as a constraint.'

Analysts say that in such an environment, retailers will find it difficult to pass on price increases to customers, who are expected to spend less as interest rates remain relatively high, and house prices shift into reverse gear.

Nevertheless, Taylor expects the FTSE-100 index to post a gain of 7 per cent next year, a far cry from the boom years, but not bad if you also factor in dividend payouts, which would give a total return of 9 per cent.

But what is the worst-case scenario? The most bearish commentators say house prices could fall by 10 per cent, wiping £300 billion off the value of Britain's residential properties.

However, David Miles, chief UK economist at broker Morgan Stanley, is not fazed. He asks: 'Does it really matter? Sellers will get less, but if they are moving to to another home, the new property becomes more affordable.'

But Marcus Aegis, head of investment bank Lazard in London, disagrees: 'People often talk about all sorts of technical issues to explain where the stock market is going, but the most important factor is sentiment.'

If the Aegis thesis is correct, which of course it is, confidence will suffer if the housing market tumbles; and that could spell trouble for Britain and America, where consumer spending, fuelled by cheap money, has kept both economies growing at over 3 per cent.

Analysts reckon different sectors will prosper in 2005. Instead of retailing, many prefer life insurers, which have had a difficult time after regulators forced them to bolster their balance sheets to meet new capital requirements.

If there is an end to what John Butler, UK Economist at HSBC, describes as 'consumer exuberance', it is possible that punters will start saving more and spending less. Miles says that in recent years consumers have been saving only about 5 per cent of their disposable income; but in the 1990s the figure was closer to 10 per cent, which passes for normal in Europe.

Few believe oil will do as well as this year, with Brent crude perhaps falling back to $30; although Shell, mired in controversy since it admitted that it had been overstating its reserves, could become a turnaround story if management measures up.

But analysts prefer pharmaceuticals to oil - the 'pharmas' recorded a negative return of minus 11.7 per cent this year following worries about the safety of some drugs and concern about a dearth of new medicines.

But many believe things can only get better, especially as research and development programmes have thrown up a number of potential blockbusters.

Few are pushing telecommunications, as it is too early to say whether the billions the phone companies pumped into third-generation mobile services were a good investment.

But media companies could make steady progress because - assuming that we escape a hard economic landing - companies will need to advertise to shift their stock.

Miles says: 'In an ideal world, consumer spending would be tailing off just as companies increase investment on things like IT, and building new factories.

'But life is seldom that simple.'