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.

Start your day with The Independent, sign up for daily news emails
News
The cartoon depicts the UK (far left) walking around a Syrian child refugee
newsIn an exclusive artwork for The Independent, Ali Ferzat attacks Britain's lack of 'humanity'
Life and Style
Man taking selfie in front of car
health
Sport
footballManager attacks Sky Sports pundit Jamie Redknapp after criticism of Diego Costa's apparent stamping
Life and Style
food + drink
PROMOTED VIDEO
News
news
Arts and Entertainment
British author Helen Macdonald, pictured with Costa book of the year, 'H is for Hawk'
booksPanel hail Helen Macdonald's 'brilliantly written, muscular prose'
News
i100
Arts and Entertainment
Frozen out: despite being filmed in Iceland, 'Fortitude' is set further north, in the Norwegian archipelago of Svalbard
tvGerard Gilbert considers what's behind our fascination with the last great wilderness
Life and Style
Carmen Khu from The Royal China Club pours a cup of Dai-Hong-Po tea
food + drink
Arts and Entertainment
film
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Web Developer - PHP

£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Day In a Page

Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

Greece elections

In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

Holocaust Memorial Day

Nazi victims remembered as spectre of prejudice reappears over Europe
Fortitude and the Arctic attraction: Our fascination with the last great wilderness

Magnetic north

The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness
Homeless Veterans appeal: Homeless in Wales can find inspiration from Daniel’s story

Homeless Veterans appeal

Homeless in Wales can find inspiration from Daniel’s story
Front National family feud? Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks

Front National family feud?

Marine Le Pen and her relatives clash over French far-right party's response to Paris terror attacks
Pot of gold: tasting the world’s most expensive tea

Pot of gold

Tasting the world’s most expensive tea
10 best wildlife-watching experiences: From hen harriers to porpoises

From hen harriers to porpoises: 10 best wildlife-watching experiences

While many of Britain's birds have flown south for the winter, it's still a great time to get outside for a spot of twitching
Nick Easter: 'I don’t want just to hold tackle bags, I want to be out there'

'I don’t want just to hold tackle bags, I want to be out there'

Nick Easter targeting World Cup place after England recall
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore