MARKET OUTLOOK: Forecasters wary after slump of '94
Tuesday 03 January 1995
The confusion caused by 1994's unexpected 9 per cent slump in the Footsie, however, is underlined by the wide range of predictions, which range from James Capel's relatively bullish 3,700 to Panmure Gordon's perenially gloomy expectation of further fallsto 2,800. The most popular target is 3,500, with Warburg, Morgan Stanley, BZW, Kleinwort Benson, Hoare Govett and Smith New Court signing up for that level.
Nick Knight of Nomura, previously a market super-bull, changes his tune this year with a relatively modest 3,200.
Capel thinks total returns from shares this year, including dividend income of more than 5 per cent, will be more than 25 per cent. That should compare handsomely with the returns from bonds and cash of 8.8 per cent and 7.5 per cent respectively.
Stewart Breed at the broker admits that Capel got it wrong last year but for the right reasons. At the beginning of 1994 it was predicting that strong earnings growth would drive the market higher.
Earnings did grow very strongly, by 32 per cent on average for the FT-SE 100 stocks, but Capel had not counted on the rout of the gilts market in the first six months of the year, as rising US interest rates drove yields higher around the world.
According to Mr Breed, that lowered the price investors were prepared to pay for shares' earnings and the market's price/earnings ratio fell during the year from a high of almost 26 to 17, wiping out the effect of higher profits.
That derating has been overdone, Capel says, and part of its forecast includes a small bounce in the p/e. The greater part, however, is expected to result from a further 17 per cent rise in average corporate earnings.
If bonds recover, equities are expected to match any rise in fixed-interest instruments, but Capel's forecast does not count on any improvement.
NatWest Securities also believes that shares will hit new highs in 1995 but cautions that towards the end of the year political worries will drag shares back again, limiting the year-end result to about 3,400.
Looking further forward, however, NatWest thinks the Footsie will reach 4,400 by the end of the decade, giving average returns on shares of 12 per cent, a bit higher than the 10 per cent expected from bonds.
The basis for its relatively bright investment picture for the rest of the 1990s is the belief that Britain has made a radical break with the post-war experience of high inflation, uninspiring GDP growth and continued problems with public sector financesand the balance of payments.
If Britain really has made the break, NatWest thinks companies will be able to lift profits at around 8 per cent a year, with dividends growing broadly in line with the economy.
Both brokers are concentrating recommendations on manufacturers rather than consumer stocks, although Capel also thinks that some volume-related consumer cyclical areas such as leisure will benefit.
With the legacy of the late 1980s investment boom, many companies find themselves able to reduce labour without reducing their ability to meet demand. There has been a structural shift in productivity.
Because of that, volume-sensitive companies will see relatively higher earnings growth in this economic upturn than last time.
Sectors expected to underperform next year include property, where rental growth remains elusive, extractive industries, where recent commodity price rises are thought to have run ahead of economic growth, and engineering vehicles, where last year's recovery in European car sales is already firmly in the price.
Next year's winners could come from the oil sector, where the oil price is expected to have another good year, diversified industrials (the old conglomerates) where order books are strong, and the drinks industry, where earnings are expected to grow strongly in 1996.
The pharmaceuticals sector could do well, with shares trading on market multiples and sporting higher yields than the market as a whole. Cash-generative media companies such as Reuters, Reed and Emap are also favoured
- 1 BBC election debate: The one photo that summed up the whole 90-minute leaders debate
- 2 A bottle of wine a day is not bad for you and abstaining is worse than drinking, scientist claims
- 3 18th century sex toy found in 'toilet of sword fighting school' in Poland
- 4 'I wish my teacher knew...': Young students share their 'heartbreaking' worries in notes
General Election 2015: David Cameron catching up in polls – but he badly needs a clear lead
The Hubble Space Telescope's amazing journey 25 years on
South Africa xenophobic attacks: Shops looted and violence on streets of Johannesburg as foreigners are forced to hide in police stations
Earthworms rain down from skies over Norway, puzzling scientists
18th century sex toy found in 'toilet of sword fighting school' in Poland
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
If I’m being racially abused I don’t need a white stranger with a saviour complex to rescue me
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
Russian warships in English Channel 'to conduct anti-aircraft and anti-submarine military drills'
iJobs Money & Business
£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...
£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...
£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...
£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...