INVESTORS are being warned to brace themselves for more stock-market turmoil as City experts predict the next 12 months will be the worst for the FTSE 100 index since the bear market of 2002.

The Footsie ended 2007 on a reasonably positive note, rising 1%, or 43 points, in the final week of the year to finish at 6,477 on Friday. However, over the whole year the index of leading British companies climbed only 4%.

When income from dividends is added in, the market has returned 8% since the year began, but it has been an extremely rocky ride – the index shed 13% in the summer as the credit crunch hit confidence.

Some analysts and fund managers think 2008 will be even worse as a sharp slowdown in the economy, continued trouble in the banking sector and a house-price slump cast gloom over the markets.

A survey of Footsie forecasts by The Sunday Times reveals experts are predicting almost no growth in 2008, with the index just 73 points higher at 6,550 in 12 months’ time.

If they are right, it will be the poorest performance from the UK stock market for five years - the first time since 2002 that investors might be better off stashing their money in a savings account.

Howard Wheeldon at broker BGC Partners, the gloomiest of our panel, expects a 9% fall, taking the Footsie to 5,900. He thinks the worst price drops will occur in the first half of 2008 as investors continue to worry about the fallout from the credit crunch and its negative impact on bank profits, the catalyst for this year’s volatility.

Estimates of losses from the sub-prime crisis of $400 billion (£200 billion) far exceed announced write-offs of $70 billion, suggesting that there is more bad news to come.

Wheeldon said: “The intensity of the crisis will remain with us for a good part of 2008 and not until each and every bank and mortgage lender has cleared the decks and fully written down high-risk assets can any form of confidence resume.

“I expect continued falls throughout the first half of 2008 and a period of flatness thereafter.”

The bears are worried that a US slowdown will throw a spanner into the global economy with some raising the spectre of a recession on both sides of the Atlantic. Concerns grew last week after data showed house prices in some of America’s biggest cities fell in October by 6.7% - a record decline on the S&P/Case-Shiller home-price index.

Investment bank Goldman Sachs is not expecting a UK recession, but still thinks the slowdown will be sufficient to knock shares back by at least 5%, and possibly 10%, by the year-end. A 5% drop would take the index to 6,150.

Georgina Taylor at Goldman Sachs said: “We expect 2008 to mark the turn in the economic cycle – US and UK growth are forecast to slow sharply at a time when financial-market issues remain unresolved.”

Investors have already started to react to the gloom. Record numbers cashed in their stock-market investments last month, pulling £333m more out of unit trusts than they put in - the first negative month since 1992, according to the Investment Management Association.

Charles East, 46, an investor from Chichester, West Sussex, has decided to rearrange his portfolio, moving some of his money out of shares and into safe-haven investments such as cash.

He said: “It makes sense to have a bigger spread of risk rather than investing almost all of my funds in shares.”

But experts are advising investors not to be too hasty about quitting the stock market. Not everyone is pessimistic - our survey shows an almost equal split between bulls and bears.

Many of the optimists are counting on the Bank of England to come to the rescue by slashing interest rates. Inflation remains a worry with oil prices at record highs and food prices soaring.

However, bulls think the threat of a sharp slowdown in the economy will force the Bank to cut rates aggressively.

The consensus view is that rates will be at 5.25% by the year-end, which will ease pressure on consumers and firms squeezed by higher borrowing costs, and provide support for the economy and equities.

Walter Edelmann at UBS Wealth Management said: “Although equities may struggle early in 2008, we think the environment will improve once growth worries recede.”

UBS expects the Footsie to jump to 7,200, an 11% rise over the year and well above the peak of 6,930 reached in December 1999. Even many bears are predicting better times ahead, suggesting that staying in the market should pay off – Goldman Sachs expects equities to recover later in the new year.

Other assets do not look like a great alternative. The value of commercial property has dropped 6% over the past six months as the sector experiences the most painful downturn since the crash in 1990.

Buy-to-let is no longer the cash cow it once seemed as higher borrowing costs eat into returns. Nationwide reported last week that house prices fell 0.5% in December. Most analysts expect the housing market to be flat in the coming year.

Some advisers back bonds, which traditionally perform well in a downturn. Returns have been poor in 2007, but that could change if the global economy takes a turn for the worse.

Many fund managers, though, are unconvinced that next year will be much better.

A lot believe that the best strategy is to bank profits from risky parts of the market in favour of defensive firms and large blue-chip companies that can ride out the turmoil.

Gary Potter of Thames River, an investment boutique that selects the top fund managers from across the markets on behalf of clients, said: “At times like this, investors should look at their investment portfolios and take profits from areas that have done well - Asia, emerging markets and smaller companies. We would refocus on funds that invest in big blue-chip companies.”

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