Brokers bullish despite warnings of economic slowdown

As the FTSE 100 once again marched higher yesterday, stockbrokers across the City predicted yet more gains for equities in 2007, driven by corporate activity, benign economic conditions and strong newsflow. London's blue chip index has registered a 10 per cent advance so far this year, closing 55 points higher at 6,245 yesterday. This comes on top of the 17 per cent jump the FTSE 100 enjoyed in 2005 and leaves it trading within a whisker of its highest level for six years.

Of strategists polled by The Independent, only two believe that the index will end 2007 lower than it currently stands.Hargreaves Lansdown, the Bristol-based broker, is most bullish on London shares and expects the FTSE 100 to hit 7,000 before the end of the year. That would be a new high for the index, a level not seen since December 1999 when the blue chips hit 6,930. Investors will certainly be hoping that Lewis Charles Securities does not prove to be one of the top forecasters next year. The broker is predicting the FTSE 100 will close 2007 at 6100, showing no growth over the year. JP Morgan is even more bearish with a 5850 forecast, the lowest of the brokers surveyed.

However, most strategists view UK and European markets as good value and expect a continued re-rating of equities. The price to earnings ratio of the London market, about 12.3 times forecast 2007 earnings, remains close to historical lows.

"We expect European stock markets to continue to rally in 2007. Valuations are supportive for stocks with a generous yield gap compared to bonds," said Lehman Brothers' strategist Ian Scott in a research note previewing the year ahead. He also expects plenty more mergers and acquisitions over the next 12 months pointing out that M&A activity in Europe is well below levels seen back in the start of 2000.

Alongside City analysts, money managers are also upbeat about UK and European stocks going into the new year. Paul Feeney of Gartmore Investment Management said: "Next year we expect market conditions to continue to favour equities. Although its likely that global economic growth will be slower in 2007 than in the last couple of years, overall the growth trend should remain positive."

Mr Feeney believes that although short-term interest rates have increased in a number of markets, long-term rates remain at historical lows with plenty of liquidity in the system. This is particularly significant as it means banks are still going to be happy to lend money and provide the financing for private equity buyouts and M&A deals that have been a key driving force behind equity gains in 2006.

After a poor year, brokers are also expecting better things from the largest UK companies in 2007. BP and Shell both look like ending the current year in the red, as do HSBC and GlaxoSmithKline. Investec Securities is looking for a rotation of money into the largest stocks. Merrill Lynch expects to see the emergence of consumer consumption in developing markets as an important trend but believes the dollar will remain weak. Common themes across broker outlooks for 2007 include expectations of another mild market correction during the year and caution over the banking sector.

JP Morgan is among those bearish on the banks. In a research note to clients yesterday it warned that the UK sector offers below average growth relative to the continent and long-term structural issues like the housing market could put valuations at risk in the coming year.

There are other potential banana skins on the horizon apart from a weaker US dollar. The amount of money private equity companies are borrowing to do deals is a worry and, should the bubble burst, it could knock the markets for six. The geopolitical risks to the markets are obvious, but a major escalation of conflict in the Middle East or a major terrorist attack in the West appears to have been discounted by investors.

This time last year, most analysts erred on the side of caution when making their predictions for the year-end. JP Morgan proved to be excessively downbeat and picks up the wooden spoon for its 2006 FTSE 100 year-end forecast. The US investment bank gave a target of 5,300 to start and although it was upgraded to 5,750 in October, it proved too little too late. Investec was also bearish, with a 5,500 prediction.

Despite the solid gains achieved by UK shares in 2006, investors needed to go to some of the world's more exotic stock markets if they were to capture the best performances. According to Bloomberg, Peru's General Index was top performer, showing a 166 per cent rise in local currency terms. This partly reflects relief that elections this summer returned the centrist candidate Alan Garcia and not the radical left-winger Ollanta Humala who had the backing of Venezuela's Hugo Chavez and had campaigned for greater state control.

However, the key driver has been the rising price of raw materials. Mining companies account for more than half of the Peruvian index and have helped the country's economy expand by around a third since 2001.

Vietnam's Ho Chi Minh Stock Index and the Venezuela Caracas Stock Exchange came a close second and third rising 143 per cent and 141 per cent respectively which goes to show that left-wing regimes can also be lucrative.

Given the turmoil in the Middle East, few will be surprised by the poor performance of its markets. Saudi Arabia's Tadawul All Share Index lost 53 per cent of its value, Dubai General Index dropped 43 per cent, the Abu Dhabi General lost 42 per cent, and the Jordan Amman General fell 32 per cent as the oil-fuelled boom of recent years imploded. Given the Israeli bombardment of Lebanon and the possibility of civil war, it is amazing the Beirut Blom Index only fell by 10 per cent.

Thailand's decision to restrict capital flows earlier this month knocked more than 20 per cent off the Thai SET Index. However, it quickly recovered after the country's military government reversed the decision days later and is now down just 3.5 per cent on the year.

It goes to show that in today's world it is often financial markets that set policy, and not governments.

News
Alan Bennett has criticised the “repellent” reality shows which dominate our screens
tvBut he does like Stewart Lee
Life and Style
The Google Doodle celebrating the start of the first day of autumn, 2014.
tech
Arts and Entertainment
Sheridan Smith as Cilla Black and Ed Stoppard as her manager Brian Epstein
tvCilla Episode 2 review: Grit under the glamour in part two of biopic series starring Sheridan Smith
Sport
David Moyes and Louis van Gaal
football
PROMOTED VIDEO
News
i100
Life and Style
Vote with your wallet: the app can help shoppers feel more informed about items on sale
lifeNew app reveals political leanings of food companies
News
Former Governor of Alaska Sarah Palin, left, with her daughter, Bristol
newsShe's 'proud' of eldest daughter, who 'punched host in the face'
Sport
New Zealand fly-half Aaron Cruden pictured in The Zookeeper's Son on a late-night drinking session
rugby
Arts and Entertainment
Salmond told a Scottish television chat show in 2001that he would also sit in front of a mirror and say things like,
tvCelebrity Trekkies from Alex Salmond to Barack Obama
Life and Style
Carol O'Brien, whose son Rob suffered many years of depression
healthOne mother's story of how London charity Maytree helped her son with his depression
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
The cover of Dark Side of the Moon
musicCan 'The Endless River' carry on the tradition? See for yourself
Life and Style
food + drink
News
Rob Merrick's Lobby Journalists were playing Ed Balls' Labour Party MPs. The match is an annual event which takes place ahead of the opening of the party conference
newsRob Merrick insistes 'Ed will be hurting much more than me'
News
A cabin crew member photographed the devastation after one flight
news
Voices
A new app has been launched that enables people to have a cuddle from a stranger
voicesMaybe the new app will make it more normal to reach out to strangers
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee / Experienced Recruitment Consultants

£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Quantitative Risk Manager

Up to £80000: Saxton Leigh: My client, a large commodities broker, is looking ...

Day In a Page

Secret politics of the weekly shop

The politics of the weekly shop

New app reveals political leanings of food companies
Beam me up, Scottie!

Beam me up, Scottie!

Celebrity Trekkies from Alex Salmond to Barack Obama
Beware Wet Paint: The ICA's latest ambitious exhibition

Beware Wet Paint

The ICA's latest ambitious exhibition
Pink Floyd have produced some of rock's greatest ever album covers

Pink Floyd have produced some of rock's greatest ever album covers

Can 'The Endless River' carry on the tradition?
Sanctuary for the suicidal

Sanctuary for the suicidal

One mother's story of how London charity Maytree helped her son with his depression
A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits