Don't bet your shirt on the market

Nobody rings a bell when the market turns, and we have had no more success than anyone else at calling the top of this cycle. We would be the first to admit our scepticism was premature, but it would take a heroically contrarian view to see the current resilience of the market as anything other than the fag-end of a bull run.

Many of the anecdotal signs of a peak are now in place: enthusiasm for blue-sky investments, no more clearly exemplified than by the imminent arrival in the FT-SE 100 index of the substantially loss-making British Biotech; heavily oversubscribed flotations and first day premiums, a classic indicator of stockmarket froth; a boom in unit trust sales, which means private investors are now pouring more than pounds 1bn a month into the market; and strong commodity prices, suggesting investors on the lookout for a safe haven.

There are some good reasons for not panicking. Bids, which have already reached pounds 10bn this year, comparing well with last year's bumper pounds 37bn total, look set to continue in the short term despite the best efforts of Ian Lang, President of the Board of Trade. The next year could provide a last window of opportunity and merchant banks are beavering away on proposals while it remains open.

The UK market has also underperformed markedly in recent months, compared with both the Dow and other European bourses, providing some scope for relative recovery. Consumer spending is showing encouraging signs of life, the housing market is picking up and recovery in Europe means the outlook for exports is better than for some time.

The bear case looks more and more compelling, however. While not desperately overstretched, the market looks as highly rated on a basket of key valuation measures as at any time since the last serious jitters in 1989. It is normally right to worry when the market is yielding less than 4 per cent, even if in a low-inflation world that represents a decent return.

Other factors that will hold shares back this year are: the high number of gilt redemptions that will divert the overseas cash that might otherwise have flowed into the equity market; an increasingly nervy Wall Street as good growth in the US economy puts pressure on American interest rates; and the dwindling prospect of a base rate cut now if that would run the risk of a politically damaging uptick in the cost of money ahead of an election.

On top of all this, we have news, courtesy of a Gallup poll, for Merrill Lynch, of a worrying switch by UK fund managers out of equities into property and index-linked gilts. According to the survey, a balance of 35 per cent of respondents are planning to reduce their exposure to equities, a marked shift in sentiment over the last month.

The biggest concern, however, is political risk, which the most bearish analysts believe could wipe 15 per cent from the market's current level if foreign investors take fright. Sell in May and go away has hardly earned its keep as a reliable stockmarket saw in recent times. This could well be its year.