Focus on good quality shares and you won't go too far wrong

1997: A preview of the year ahead; Stock Markets

The maturity of the current bull market in equities was brought home on New Year's Eve when a British Gas engineer , a propos of nothing, least of all the heating he had come to fix, began expounding his investment philosophy. His thoughts were a timely reminder of the old adage about shoe-shine boys on Wall Street - when the gas man cometh with share tips a crash must surely be around the corner.

His enthusiasm for shares brought to mind another, no doubt apocryphal, tale from 1929 when a lift-boy at JP Morgan plucked up the courage to ask the great man himself what he thought the market would do that day. "It will fluctuate, boy, it will fluctuate," was the banker's considered response.

Morgan's message was that a proper investor, as opposed to the speculator he rightly assumed the boy had become, tried not to worry about the state of the stock market but focused on good quality individual shares. Anyone who lived through the bear market of the early 1970s, however, knows that not even the best shares can shrug off a determined sell-off.

Between the spring of 1972 and the end of 1974, the stock market lost almost three quarters of its value, so it is no wonder at the end of a year in which the Dow Jones index rose by 27 per cent, dragging the London market up on its coat-tails, that it is not just gas engineers spinning out their overtime who fret about the direction of the market in 1997.

To put things in perspective, if the London market were to stage a re- run of the early 1970s, the FTSE 100 index, which closed 1996 at a record high of 4118.5, would bottom out shortly before the millennium celebrations at a low of 1,112.0. If bull markets are said to climb a wall of worry, they don't get much steeper than that.

In an election year when the first change of government in 18 years looks probable, with investors struggling to acclimatise themselves to an economy which threatens to have discovered steady growth without inflation, and with stock markets on both sides of the Atlantic flirting with record highs, it is no surprise that the City is sharply divided on the future direction of share prices.

The bear argument is essentially this: Wall Street is grossly overvalued on a number of measures - according to one, the aggregate value of stock market quoted companies is now for the first time ever greater than the total US gross domestic product. As a result, the Dow will almost certainly experience a sharp correction sometime soon and, while London is not so pricy on fundamental measures, the two markets fortunes are so closely entwined that a fall in the US will inevitably spill over here.

Talk to Smith New Court's Andrew Smithers, one of the Square Mile's dourest Jeremiahs, and he will paint you a convincing apocalyptic vision of an overheating UK economy, fuelled by the failure of Kenneth Clarke in at least the last two Budgets to raise taxes or cut spending. Fiscal and monetary policy are out of balance, he says, and interest rates will have to rise to make good the shortfall. That will prick the economic bubble, sterling will fall, and the door will open for Britain's old enemy stagflation. The market will end the year well below its current level.

The problem with that sort of view, apart from the fact that for most of the past 75 years it has been wrong, is that it doesn't sell shares. No surprise then that Mr Smithers, and his bearish cohorts in the fund management business like PDFM's Tony Dye, are the exception rather than the rule. For the rest of the City, a watered down version of the bullish line taken by NatWest's Bob Semple is the favoured safe option.

Mr Semple's view is that an incoming Labour government will inherit an economic environment many of us thought we would never see in our lifetimes: solid economic growth, low inflation, falling unemployment and the external account in broad balance. Gordon Brown's first budget will set a prudent fiscal policy (with one eye on keeping Maastricht options open) and an aggressive upward move in interest rates to 7 per cent will take the edge off consumer spending.

That should ensure a longer-lived economic cycle, inflation will fall back towards the Government's 2.5 per cent target in the second half of the year and gilt yields will fall. The equity market, already underpinned by continued strong earnings and dividend growth, will look increasingly cheap and large amounts of institutional cash sitting on the sidelines will push the market to new highs, possibly 4,600 by year-end.

The truth probably lies somewhere between the Semple and Smithers scenarios and we would expect the FTSE 100 to close 1997 at around 4,300 and the Dow Jones index, driven by rising earnings and a maintained rating, at close to 7000. The Nikkei, which has threatened recovery for four years now, will have another indifferent 12 months.

Consumer stocks will continue to benefit from rising high street spending, benefiting retailers, leisure companies and the brewers. Growth stocks will struggle to repeat the last two buoyant years and high yielders, the market's dogs during that time, will have their day. The gas man will still be reading the Investors Chronicle and the market will still be fluctuating, boy.

Arts and Entertainment
Jake Quickenden sings his heart out in his second audition
tvX Factor: How did the Jakes - and Charlie Martinez - fare?
Frank Lampard and his non-celebration
premier leagueManchester City vs Chelsea match report from the Etihad Stadium
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave crime series
premier league
Mario Balotelli celebrates his first Liverpool goal
premier leagueLiverpool striker expressed his opinion about the 5-3 thriller with Leicester - then this happened
people'I hated him during those times'
Britain's shadow chancellor Ed Balls (L) challenges reporter Rob Merrick for the ball during the Labour Party versus the media soccer match,
peopleReporter left bleeding after tackle from shadow Chancellor in annual political football match
Arts and Entertainment
Female fans want more explicit male sex in Game of Thrones, George R R Martin says
tvSpoiler warning: Star of George RR Martin's hit series says viewers have 'not seen the last' of him/her
Dame Vivienne Westwood has been raging pretty much all of her life
peopleMemoir extracts show iconic designer 'felt pressured' into going out with Sex Pistols manager
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
fashionAlexander Fury's Spring/Summer 2015 London Fashion Week roundup
Arts and Entertainment
Lauryn Hill performing at the O2 Brixton Academy last night
musicSinger was more than 90 minutes late on stage in Brixton show
Rumer was diagnosed with bipolarity, attention deficit hyperactivity disorder and post-traumatic stress disorder: 'I was convinced it was a misdiagnosis'
peopleHer debut album caused her post-traumatic stress - how will she cope as she releases her third record?
people''Women's rights is too often synonymous with man-hating'
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam