The Year Ahead: City looks for Footsie to regain 6,000 next year

With just three share trading days left this year, equity analysts are turning their gaze towards the likely outlook for the London stock market in 2006.

The market was closed yesterday but on Christmas Eve the FTSE 100 briefly broke through the 5,600 barrier for the first time since August 2001, although it ended the day down a fraction. Analysts in the City expect the market to return to that staging post on its way towards regaining the 6,000 level during the course of the year.

The average of 25 forecasts issued in December showed the FTSE rising to 6,000 points by the end of 2006, which would be an annual gain of 7.1 per cent - assuming that nothing dramatic happens between now and the close of play on Friday. This forecast was a considerable increase on the 5,700 median in a similar poll conducted by Reuters' September poll.

"The valuation support for UK equities is in our view still considerable," Darren Winder, a strategist at UBS, said. "Although current levels of profitability will be difficult to maintain over the longer term, any adjustment in 2006 is likely to be relatively modest."

Although the forecast rise would be more modest than the expected 16 per cent in 2005, it would look very respectable when compared with just 4 per cent in 2003 and falls in the three preceding years.

"We believe the balance remains firmly in favour of taking judicious risks in portfolios, to benefit from global growth, which remains strong," said Hilary Cook at Barclays Stockbrokers, which has pencilled in 6,050 as a target for the end of the year. "Mergers and acquisitions and private equity will continue to offer a layer of support."

M&A activity helped drive the London market to four-year highs this year with one day in October seeing four deals worth £25bn unveiled. O2, the mobile phone company, was bought by Telefonica, a Dubai company bid for P&O, Pilkington got an approach from its rival glass maker Nippon Sheet Glass and the retailer Peacocks announced a management buyout.

Analysts are also hopeful that an expected cut in UK interest rates will boost profitability and reduce the cost of borrowing for any would-be buyers of UK companies. Charles de-Boissezon, a strategist at Deutsche Bank, said the bulk of the increase in the index would come in the first half of the year "with the macroeconomic supportive and Bank of England cuts a possible help".

He said the outlook for world markets depended on the tightening programme by the US Federal Reserve. "When liquidity is withdrawn and the focus shifts to 2007, the going will get tougher," he said.

Strategists said the key risk to the FTSE's 2006 performance was if the Federal Reserve raised its key rate above 4.5-4.75 percent levels, having already quadrupled them to 4 per cent since June 2004. Strategists said sectors which have underperformed the wider market this year, such as telecoms and general retailers, could be due for a rebound in 2006.

Blue chips retreated in the half session of trading before Christmas Eve. The FTSE 100, which closed at 12.30pm, lost 1.6 points to 5,595. But the FTSE 250 continued its march into new territory and finished at a record 8,759, up 32. The housebuilding sector was the driving force behind this performance with investors still buoyed by Thursday's bullish trading statement from Wilson Bowden. George Wimpey rose 12.25p to 487.25p in surprisingly brisk trade - more than 3.5 million of the group's shares changed hands. Barratt Developments gained 5p to 995p, Bellway added 15p to 1,121p, Persimmon put on 24p to 1,275p, and Bovis Homes ticked 4p better to end at 780p.

Greene King dropped 7.5p to 736.5p on the back of a downgrade from UBS. "Although we continue to view the company as well placed to make value-adding acquisitions we see limited upside potential to current market (profit) forecasts", the Swiss broker said, as it downgraded the pubs group to "neutral" from "buy".

Meanwhile, Asos returned from suspension and assured the City that most of the damage caused to its Hemel Hempstead premises by the explosion at the Buncefield oil depot can be rectified within the next few weeks. The online clothes retailer said its profits for the current financial year would not be affected by the disaster and this pledge meant that shares in the group closed down just 2p at 75.5p, although at one point during the session they traded as low as 68.5p.

Seymour Pierce was among a clutch of brokers who were urging investors to use any weakness in the stock as a buying opportunity. The broker said: "Given the extent of the damage in the area, Asos has escaped relatively lightly." The broker sees the group as providing one of the best growth situations in the retail sector.