Few Footsie fireworks forecast: Diane Coyle sounds out fund managers on what is in store for '94

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COMPANY profits could rise by a further 15-20 per cent in 1994 as the economic recovery progresses, but most analysts and fund managers predict the FT-SE 100 index will end next year only 250 points or so above its current level of 3,355.7. With a near-15 per cent gain in the index since the Budget, they think much of the good news is already in share prices.

Most of the forecasts made at this time last year, clustered around 3,000, proved too pessimistic. This year the average forecast is that the index will be just under 3,600 by the end of 1994. The fear that growth will turn out to be weaker than expected lies behind the cautious consensus.

Nick Train, fund manager of GT, says: 'I'm not a really growling bear, but we do not expect dividend growth to meet investors' expectations.' Jeremy Tigue, of Foreign & Colonial, agrees: 'The markets have been quite excited in the past few weeks and anticipate a lot from next year. There could be disappointment.'

Though weak growth could prompt lower interest rates, many analysts are concerned that the impact of next April's tax increases has been under-estimated. Mark Tinker, of James Capel, is not among them. He forecasts that the FT-SE 100 index will reach 3,750 and adds that it could go higher. He believes the improvement in productivity will help demand and 'push a lot of companies into good- time profits'.

Fund managers who have money riding on their predictions say the market is less attractive after the post-Budget run, and they will look for selling opportunities if it continues to move ahead.

Even so, they expect the UK to outperform other equity markets, at least until later in the year, and are not changing asset allocations. Dick Barfield, Standard Life's chief investment manager, says: 'The year ahead looks brighter for the UK than for many other countries and should see the continuation of economic growth at a moderate rate allied with low inflation.'

Most analysts and fund managers favour sectors that benefit from falls in interest rates and the early stages of recovery. These include financial stocks, contracting and construction, and building materials. Telecommunications and media are also popular sectors because, as Richard Kersley of BZW puts it: 'These are among the few genuine growth stories around.'

Smaller companies, included in the broader indices such as the FT-SE 250, are also favoured as more sensitive to economic recovery. Despite a boom in second-tier stocks this year, Richard Hughes, of M&G, says: 'Smaller companies have had a much longer period of under-performance. They haven't yet caught up.'

The FT-SE can look forward to a good start to the new year because of the January effect. In an average year, returns are nearly six times higher in January than in other months, as institutional investors commit cash at the start of the year. Many believe there will be scant excitement later.