What is driving Wall Street higher at the moment is the huge wave of confidence that is sweeping through American industry.

INVESTMENTS

Who can England know who only England knows? The question was first asked by Kipling many years ago, but it is one that is just as pertinent today for anyone trying to fathom what to make of the UK stock market. The Footsie last week touched a new all-time high: and the issue now is whether this is a staging post in a new phase of a bull market or merely a brief high spot en route to a more serious correction.

Whichever it is, a good deal of the answer lies in what happens on the other side of the Atlantic, where Wall Street continues to thunder forward on what remains an impressively prolonged bull run. By the end of July, it had risen for eight straight months in a row. There was correction last month but the market is again now nudging back up towards its all- time high.

The importance of this for the London market is that the two enjoy a close relationship. When Wall Street rises, London tends to follow. And when Wall Street falls, the London market in time tends to do the same. It was not always like this: in the 1970s, for example, during the darkest days of Britain's post-war economic malaise, the relationship between the two markets was much less close.

But since the beginning of the 1980s, the relationship has tended to remain in a relatively narrow range. This is hardly a coincidence. Both countries have pursued broadly similar economic policies and our economies have followed the same kind of cyclical path - the one exception being Britain's short and painful experiment with membership of the exchange rate mechanism.

The London stock market itself has meanwhile also changed its character quite dramatically. Deregulation has brought an influx of foreign players into the London market, exchange controls have been lifted and standards of research and investment management have improved noticeably. It is both a more professional and a more internationally focused place.

All this has taken place against a background of dramatically increased capital flows between the major world markets. One consequence of this is that markets have become less insular and more sensitive to developments elsewhere in the world. Another, much commented on since Britain's departure from the ERM in 1992, is that the government's freedom to manoeuvre in economic policy is limited by the growing power of the financial markets.

The interesting question that all this poses for the London market now is whether Wall Street's strength is an opportunity or an illusion. As the markets in New York have powered ahead, the performance of the two markets has diverged. The Standard & Poors 500 Composite Index, for example, has risen nearly 21 per cent in the last 12 months. The FT All-Share index is up just 9 per cent.

While the dividend yield on the UK market has consistently been higher in London than in New York, the gap between the two is also wider, proportionately, now than at any point in the last 15 years - again with the sole exception of the period immediately preceding the ERM crisis in 1992. According to Datastream's calculations on Thursday, the S&P 500 now yields 2.48 per cent and the FT All-Share index 3.80 per cent.

There are only two conclusions that can be safely reached about this trend. One is that the American market is now overvalued while the London market is fairly valued. The other is that London is the undervalued market. Many in the London investment community reckon it is the latter. That at least is how they are selling it to their clients. They have plenty of charts and ratios with which to back up their pitch. If they are right then the London market may be entering a run of strength that will persist for some while yet, just as Wall Street has for the past year.

Nothing in the immediate outlook threatens this prognosis. The pundits are divided between those who worry about resurgent inflation and those who worry about slower growth turning into a fresh recession. The current wave of bids and deals certainly looks like continuing which itself helps to underpin he market. It is a plausible tale. But for my money Wall Street will have a correction soon and it will probably be quite a sharp one.

What is driving it higher at the moment is the huge wave of confidence that is sweeping through American industry. Five years ago many of the leaders of America's biggest companies were in despair at what seemed to be their inability to compete effectively against the Germans and the Japanese. They have invested a huge amount of energy, time and money into sorting out their problems. Now they can see the Germans and the Japanese struggling and are moving to take advantage of their renewed lead.

But it is worth remembering that where the real economy is today, the markets have usually already been 18 months to two yeas before. Investors in the UK market would be wise to remember two things, in my view. One is that the US market is heading for a correction soon. The other is that while the relative valuation of the two markets favours London, in absolute terms the market here is by no means cheap in historical terms. Only if we are entering a period of sustained very low inflation and high growth - which looks less clear today that it did say a year ago - are we likely to get a bull market run to match the one which the Americans have enjoyed over the last nine months.