Discounting a bull market: Most brokers and fund managers expect the FT-SE 100 index to end 1993 little changed after its 350-point gain since Black Wednesday, says Heather Connon

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The Independent Online
COMPANY earnings could rise by as much as 20 per cent next year, while dividend growth should outpace inflation - but most brokers and fund managers expect the FT-SE 100 index of leading shares to finish 1993 less than 200 points above its current level of 2,847.8.

Most strategists, whether from stockbroking firms or fund managers, believe that the rise in share prices since sterling was devalued - the FT-SE 100 has gained almost 350 points, or 14 per cent, since Black Wednesday - means the market is fully discounting an economic recovery.

A further significant advance in the market will depend on evidence of that recovery coming through in company profits.

Most analysts and investors believe the FT-SE 100 will end the year at between 3,000 and 3,100. The average is, however, distorted by the two bulls in the survey - Smith New Court, which expects it to reach 3,400, and Nomura, which thinks it will race ahead to 3,500 on the back of a 30 per cent rise in earnings per share. Most of the others expect it to end the year at about 3,000.

Paradoxically, Nomura was the most pessimistic about share prices for this year; at the beginning of 1992 it was expecting the index to end the year at 2,500. Now, Anthony Broccardo says: 'The market has moved up strongly in the expectation of economic recovery, but the expansion in multiples has finished.

'Next year, the market will move ahead, although multiples will stay at similar levels, because of the benefits to profits which will start coming through from devaluation and rationalisation by companies.'

Phil Wolstencroft, of Smith New Court, also believes the rise will be recovery-driven, spurred by the change in government policy since devaluation.

'Last year, the Government's number one priority was currency stabilisation, now it is economic growth. Either the economy is already picking up, which means profits will improve. Or, if it is not - which should be evident in the first four months of the year - interest rates will be cut.'

That change in government policy saved the forecasts made this time last year. Without it, predictions of up to 3,000 would have looked badly out of line. At the end of 1991, the key factors seemed to be the outcome of the general election - and, for some of the forecasts to be right, Labour should now have been in power - and falls in German interest rates. Nobody seemed to be expecting devaluation, nor the problems that the German economy is suffering.

With uncharacteristic consistency, some firms are forecasting exactly the same for the end of 1993 as they were for this year - although for rather different reasons. They believe that next year's good news is already in share prices, and any further advances would make the market look too expensive.

Richard Kersley, of Barclays de Zoete Wedd, sees parallels with the US market, where shares raced ahead in late 1991 and early this year following a sharp reduction in interest rates - 'but it moved sideways for the next nine months as ratings waited for the economic evidence to justify them'.

Dick Barfield, of Standard Life - one of Britain's biggest investing institutions - expects company profits to grow 20 per cent next year, spurred by cost-cutting and devaluation. But, bearing out the theory that the good news is already in share prices, he has been increasing Standard Life's exposure to UK equities over the past two to three months.

His forecast of 3,000 implies an investment return of about 13 per cent, of which about 9 per cent will come from capital growth and 4 per cent from income. That may look low compared with the 21 per cent and 18 per cent achieved in 1991 and 1992, but, with underlying inflation expected to remain below 4 per cent for most of next year, it will still be attractive.

One big worry for forecasters is the public sector deficit. The Government will have to issue more than pounds 50bn of gilts, or pounds 1bn a week - equal to the entire institutional cash flow expected in 1993 - if it is to fully fund the deficit, and that could dramatically reduce the amount of cash available for investment in shares.

In theory, foreign investors are expected to suck up much of that gilt demand - provided the Government manages to persuade them the economy really is sorted out. But, in practice, Mark Brown, of UBS Phillips & Drew, believes 'something will crack' - that is, the Government will be forced to change its full funding policy by selling some of the gilts to banks, rather than investors.

Many of the forecasters expect their targets to be achieved - or even exceeded - in the first half of the year. Jeremy Tigue, of Foreign and Colonial, expects the index to achieve 3,000 by June, then make little progress.

And this could finally be the year of the second-tier stocks. M&G, which has a high exposure to small companies, expects them to outperform. And BZW's Mr Kersley thinks the new FT-SE 250 index, which picks up more of the capital goods and cyclical companies, will be the driving force.

(Graphic omitted)

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