William Kay: FTSE must bear further fall before bull run begins

I have said little about the likely course of the stock market since before the Iraq war, but the FTSE 100 index's forays over 4000 suggest that we are reaching a critical stage. The bears have been in retreat since the leap from the March low point, the bulls are pawing the ground in anticipation and the chartists are dissecting every twist and turn for a sign that it is going to go one way or the other.

I have said little about the likely course of the stock market since before the Iraq war, but the FTSE 100 index's forays over 4000 suggest that we are reaching a critical stage. The bears have been in retreat since the leap from the March low point, the bulls are pawing the ground in anticipation and the chartists are dissecting every twist and turn for a sign that it is going to go one way or the other.

The 20 per cent or so recovery since this year's low has certainly made many analysts and investors reassess, and newspapers have been peppered with articles asking, "Is this the time to buy?" However, some of the steam has been taken out of that trend by the London stock market's nervous response to breaching 4000, and, more particularly, its retreat to the low 3900s after the Bank of England squashed widespread hopes of a cut in interest rates.

That cut had most definitely been factored in, as the analysts like to put it, so its non-appearance was a clear disappointment that showed how fragile the recovery has been. But the hesitation the day before suggests to me that there are some hefty sellers just sitting and waiting for share prices to reach a level at which they can respectably get out. That does not show a lot of faith in the notion that the next bull market has already arrived.

There was bound to be euphoria as the course of the Iraq war became clear and as the speed of its conclusion became apparent. But as Iraq has gradually disappeared from the front pages, it has been replaced by renewed concerns about the global and UK economies.

Tony Dolphin, director of global economics and strategy at the soon-to-be-demerged Henderson Global Investors, stepped forward this week with the gloomy but unarguable view that all the major trading zones – the US, Japan, Europe and the UK – needs a weaker currency to stimulate their economies. But currencies are a zero-sum game: if one goes up, another has to come down, certainly in the big league. They can't all fall together; or, as Mr Dolphin put it so succinctly, "this is a conundrum with no solution."

As far as the UK is concerned, Mr Dolphin predicts soggy growth and low inflation next year, with consumers resilient but fading. Manufacturing would be the traditional sector to take up the running, with lots of orders, stockbuilding and investment.

Trouble is, manufacturing is a relatively small part of the British economy these days, and there is only so much anyone can do to export services such as tourism, insurance or financial trading. The bulk of the service sector, from hairdressing to Chinese takeaways, is firmly rooted in consumer spending, which is fading. The outlook is choppy at best.

All of which encourages me to stand by my previous prediction, that the FTSE 100 will fall below 3000 before the bull can start running in earnest. But that is not a reason for staying out of the market, because no one can predict exactly when the bottom will be reached. So I am still buying equities on a monthly basis, taking advantage of the falls to lock in low buying prices.

* The pension debate moved on to a significant new stage this week. Instead of companies ditching their final-salary schemes in favour of defined contributions, we had the sight of a large company telling its employees that they would have to work until they were 65 rather than 60 before they could collect their pension.

I believe that the decision by Axa, the French-owned life insurer, will be only the first. Now that the wall has been breached, many more will follow Axa, despite howls of anguish from trades unions.

I do not think that either development – defined-contribution schemes or later retirement ages – are in themselves bad. Indeed, when stock markets revive I am sure that employees will do better out of defined contribution than they have out of final salary, which only ever benefited those few who stuck with one employer for their entire working lives.

And later retirement ages are simply an inevitable reflection of the fact that we are living longer. The idea of ending our lives in a 20-year holiday, without having saved any more to pay for it, was always a fallacy that employers and government had to bring to an end.

Now that a company has bitten the bullet, perhaps even the government will address the problem of raising the state pension age to 70. It has to happen: it's only a question of when.

w.kay@independent.co.uk

William Kay is personal finance editor of 'The Independent'