Comment: What the heck, let's try another market forecast

'It is hard to disagree with the general opinion that after continuing to rise strongly up to mid-year, share prices will fall back to finish the year roughly unchanged'
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The Independent Online
Yes, it has to be admitted. Since about the middle of the year, this column has been consistently wrong about the stock market, having adopted, until quite recently at least, a bearish stance on shares. As it is, the market has finished the year on a high note, with the FT-SE 100 closing at a record high of 3,689.3, a gain of more than a fifth since its low point last January.

What does the new year hold? Given our record, we should perhaps be leaving the prediction game well alone this time round, but what the heck, here goes anyway. It would be nice to take a contrary view on prospects for the London stock market. Unfortunately, it is hard to disagree with the general opinion that after continuing to rise strongly up to mid-year, share prices will fall back to finish the year roughly unchanged.

In itself, this seems an unremarkable prediction but there could be fireworks within it with the FT-SE 100 index perhaps breaking the 4,000 barrier at some stage in the first six months before falling back strongly, possibly in the form of a substantial single correction.

Interest rate cuts, a continued high level of takeover activity, and further strength in overseas markets should all power the stock market to new heights as the new year gets under way, but then comes trouble. Growth begins to take off once more and an increasingly rocky Government, on the cusp of losing its majority and with the election looming, refuses all advice to choke off growing inflationary pressures by re-adjusting interest rates upwards. Kenneth Clarke has ignored the Bank of England's advice once before and got it right, but as Eddie George has remarked, he got lucky. Such luck is unlikely to be repeated. Bonds got the heeby- jeebies, dragging equities with them.

But all this is some distance in the future. For the time being, the weather looks set fair for shares. Equities continue to look the best value around for institutions desperate for a place to stash burgeoning quantities of cash. Moreover, London looks cheap by international standards.

Where to spend the money, money, money

Money, money, everywhere, but where in the world to spend it? The world as a whole is unlikely to be short of cash for equity investment next year. According to Barings, $330bn flowed into international portfolio investment this year, of which $145bn has probably been invested in emerging markets (four times as much as in 1989). Both sums are going to run yet further in 1996. In theory, this favourable background ought to mean stronger stock markets worldwide. But investors have a more than usually difficult task in deciding where to put their money.

Off-setting a possible glut of capital and lower interest rates is the prospect that growth world-wide will slow and corporate earnings may weaken in many countries. Privatisations, including Deutsche Telekom, the biggest of all, will also mop up cash. Hoare Govett reckons that in large markets new issues and privatisations will rise by $14bn to $54bn next year.

Continental Europe provides both opportunities and dangers. Italy continues to suffer from the fragility of its politics. In France, all hangs on the durability of the Franc fort policy. A continuation of the policy could drive up interest rates yet further and accelerate a weakening of the French market. If it fails, the stock market will boom after the initial shock but the effect for foreign investors could be offset by a devalueing Franc. For the cautious, Germany is a better bet.

The US, where the market has risen by more than a third in 1995, looks set to rise further as interest rates are further eased. Curiously, the approach of an election is often good for equities in the US. But the bond market cycle may be nearing the bottom and corporate earnings growth is easing. Next year the Dow may end higher, but the chances are it will be with a whimper rather than the 1995 bang.

The Japanese equity market has risen by nearly 40 per cent from its low point, a recovery that surely cannot continue at anything like the same rate given the persistent fragility of the economy. It may be that emerging markets in Asia, Latin America, and some of the former communist countries such as Poland, many of which have been suffering a long hangover after the euphoria of 1993, will be the flavour of 1996.

Keeping the utilities in check

Ian Byatt's intriguing idea that merged water and electricity companies should maintain seperate listings for the core utility operations seems to have moved on a peg or two. In a letter to the Financial Times, he goes a stage further to argue that a seperate listing should perhaps be maintained in all water companies. This, he suggests, would be the most effective way of ring-fencing the regulated business in the interests of customers from other diversified activities of the group.

On the face of it, the proposal has much to commend it. As Mr Byatt points out, an independent listing would force the utility to keep its activities totally separate from those of the parent, most obviously by requiring that a majority of the directors are independent of the parent and ensuring that decision-making is in the subsidiary's interests, not those of the wider group.

There are fundamental problems with this approach, however. When they were privatised, water companies were encouraged to diversify and behave like other commercial companies. That was part of the deal.

Furthermore, the maintainance of a separate listing would deprive the parent of many of the tax, cost and other benefits of group-wide management as well as in itself being a costly affair. Far from being a bad thing, to have larger, more professionally managed organisations run the utilities might be beneficial. There is no reason the utilities should be kept independent provided adequate regulatory safeguards exist.

Alternative gongs for unsung heroes

Many deserving cases within the business and City community have failed yet again to get the expected gong. The following alternative New Year's Honours List is offered up by way of consolation. Step forward Sir Cedric Brown, for services to customer relations; Sir Ed Wallace, for providing the Labour Party with hours of fat-cat jibes, Sir Rupert Murdoch for the amazing double of long service to the Tory Party and ground-breaking research in tax-avoidance,Sir Peter Baring (an OBE goes to Nick Leeson), for an outstanding contribution to the campaign for reform of banking supervision, Sir Rupert Pennant-Rea for services to the carpet industry, and finally a life peerage for Sir Gordon Jones, chairman of Yorkshire Water, for services to the transport industry in Yorkshire. His chief executive, Trevor Newton, is awarded the Order of the Bath.

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