London shares had a topsy-turvy day yesterday with traders still unnerved by recent share-price falls. An early-morning sell-off saw the FTSE 100 fall 56 points, wiping out all gains made this year, but it recovered to close just 3.9 lower at 5,671.6. It was just above the lowest close for the year - 5,633.8 on 24 January.
However, many equity strategists remain upbeat on prospects for the year and urged investors not to panic.
Peter Oppenheimer, the head of European portfolio strategy at the investment bank Goldman Sachs, is still broadly positive on UK equities and said most of the underlying factors behind the rising equity markets remain strong. "There has certainly been a shift in inflation expectations and the last few sessions have shown a rapid reduction in appetite for risk," he said. "Even so, we see no problem with valuations of the UK stock market and we remain overweight in equities globally."
Even taking into account the bull run over the past three years, which has seen the FTSE 100 more than double in value, most industry experts believe London shares are not expensive. During the dot.com boom, when the index peaked at 6,930.2, the market traded on a forward price-to-earnings ratio of nearly 22 times. According to Goldman Sachs estimates, the London market trades on about 12.5 times expected earnings.
Market makers saw a dramatic increase in selling on Wednesday afternoon as fears over US inflation led to the London market falling more than 170 points. The early indications yesterday were for more selling, particularly in the commodities sector which has been the main beneficiary of the three-year bull run the London market has enjoyed.
Errol Francis, the manager of the Credit Suisse Income Fund, agreed that UK equities offer reasonable value, particularly in the large-cap stocks. "The market was due a correction after a very strong run, but markets are likely to remain volatile throughout the summer until there is more clarity on the direction of US interest rates and inflation," he said.