Six weeks on the City's see-saw

Is it just a blip? Is the bull run over? When will the market chaos end? The experts give their views
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It was all going so swimmingly. Markets were on the up and commodities and equities were booming. There was the odd whisper of a bubble, and some concerns about what effect the surging prices would have on the global economy. But generally, the mood was good.

And then, on Friday 12 May, the FTSE 100, which had been trading at well over 6,000, slumped 130 points. The volatility has refused to go away since then, with markets starting to recover only to come crashing down again. Spooked by stronger than expected American inflation data, the FTSE 100 closed last Wednesday at 5,506 - though it went on to finish the week at 5,597.40.

Much has been said on the reasons for this turbulence, but not everyone has come to the same conclusions, especially on how long it will last and what will stop it. So The Independent on Sunday has canvassed expert opinion across the City about what, exactly, is going on - and what to expect in the coming months.

The economist

Rising inflation and possible interest rate rises in the US are two of the biggest contributors to the current volatility. But they are not the only ones. "What's happening is the introduction of greater uncertainty," says HSBC economist John Butler. "Central bankers seem concerned that inflation is rising. The question is whether they will react by raising interest rates by more than anticipated. If they are tightened too far, it hits growth and leads to a slowdown."

Not that this is necessarily a bad thing. "An open discussion and realisation that there are problems - and massive global imbalances - is good. It's a fair illustration of the true risks that are already there."

HSBC is predicting that US interest rates, currently 5 per cent, will hit 5.5 per cent by September. But don't expect that to bring matters to a close: if inflation continues to rise, so will rates. "At the moment, the discussion is inflation. In six months' time, it's going to be growth."

The private equity partner

Flotations are one of the two routes open to private equity firms when they want to make their exit from the companies in which they have invested. "Volatile markets will make initial public offerings more difficult to pull off," admits Guy Weldon, a partner at Bridgepoint, the European private equity firm. "This will cause more indigestion for larger buyout funds that are more reliant on floats for exit."

But the news is not all bad for the private equity world. "We typically hold our investments for three to five years," says Mr Weldon. "So while the level of the FTSE 100 is important as a valuation mechanism and a confidence indicator, we can take a slightly more detached view; the day-to-day or week-to-week movements of the FTSE are less relevant to what we do."

The currency expert

Despite the dollar's stronger showing over the past six weeks, Ian Stannard, a currency strategist at BNP Paribas, sees pressure for the rest of the year. "The real risk for the dollar is if the market's concerns switch from [rising] inflation to [slower] growth, and we're starting to see that happen now." He predicts that the greenback will finish 2006 at $1.35 against the euro and $1.87 against the pound; it started the year at $1.18 and $1.72 respectively. "The euro is going to be well supported as the European economic outlook is gaining momentum and the recovery is becoming more broad-based," adds Mr Stannard.

The company director

Asked if the slump in global stock markets has hit his company, Jonathan Klein, the chief executive of US picture provider Getty Images, is emphatic: "Not at all." But that's not to say he does not have concerns, in particular over the US Federal Reserve's new chairman, Ben Bernanke. As he puts it: "The jury is still out."

One of the biggest worries in the UK is not the swings in company share prices, but currency movements. Says Paul Adams, the chief executive of British American Tobacco: "If exchange rates [remain weak], it's going to have a significant impact on our business. About 40 per cent of our operational profit is from dollar or dollar-related currencies."

The commodities trader

The record price rises in commodities were driven, not just by long-term factors such as the booming Chinese economy, but also by investors sensing profits and piling in. Growing concerns about inflation and interest rates, however, have brought them, and prices, back down to earth.

David Holmes, the director of precious metal sales at Dresdner Kleinwort Wasserstein, expects the turbulence to continue over the summer. But then some good news: a rally later in the year. "We still buy into the global growth story. We've seen the bulk of the correction."

He is particularly bullish on metals. And while gold may have slumped just last week, he believes it will rise as investors embrace its safe-haven status.

The hedge fund manager

This is one of the few sectors where people might be upbeat. The turbulence "allows you to exploit and take different positions and that's all very positive", says Marc Gordon, the managing director of the Close AllBlue fund of hedge funds. "But it's hard to generalise; for some strategies it's not always helpful."

And he warns: "People have forgotten what happened a few years ago. Things have been rosy, and the appetite for risk until recently had become quite substantial. We are now at 5,500, but that could go down to 5,000."

The fund manager

If you're hoping equities will return to their stellar rises after the slow summer months, you'll be disappointed, says Paul Niven, F&C Investments' head of asset allocation. "It's likely we've seen the best of the market for this year. Volatility is going to remain high and the bull market, driven by an upturn in earnings, is largely over."

So, as an investor, where will he be looking for growth? Despite the concerns about the US economy, Mr Niven believes its markets will do well. He forecasts that the S&P 500 will finish the year above 1,300 (against 1,260 now), and the FTSE 100 at around 5,800.

The banker

So what does this mean for mergers and acquisitions? Louise Wilson, the head of European equity capital markets at investment bank UBS, is sanguine: "Although volatility has picked up significantly, there is not enough to suggest that, as chief executive, you would think about changing your strategic plans. I would be surprised if M&A ambitions were much affected."

And long term, Ms Wilson is quietly confident. She believes the markets had been ignoring various issues that usually depress equities, such as the surging oil price, so a correction was on the cards. "The reason it's been so painful is that it's been quite a big fall in such a short period. If we agree that equity markets have got ahead of themselves, then I'm not sure we want to race back to where we were. A steady sideways to upwards move is ideal."

The equity strategist

Morley Fund Management's investment strategist, Gerard Lane, is the first to say the dreaded word: recession. "I have become more cautious. I had not factored in the possibility of a recession until a month ago. We're starting to see a lot more weak economic data coming through and the risk is that the market will over-react."

US technology stocks are likely to be some of the biggest losers as the year progresses, but that banking, oil and some retailers in the UK should do well, he says.

Roger Cursley, an equity analyst at Investec, says: "I forecast 5,500 for the end of 2006 at the start of the year, and I haven't changed that. We've climbed the mountain and are near the top. But there's a little more pain to come."

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