The FTSE 100 is poised to continue its rampant run next year, putting it on course to end 2007 at highs not seen since the peak of the tech boom.
Aside from a sharp correction in May, the London stock market performed strongly throughout 2006. It started the year just above 5,600 points and on Friday, when trading finished ahead of the Christmas break, the blue-chip index closed at 6,190.
And despite concerns about consumer spending, interest rate rises and a potential slowdown in the US, analysts are optimistic that 2007 will be another buoyant year for the leading stocks.
"There's nothing on the horizon that's going to knock this run off track. We're firmly in a global bull market driven by huge growth in China and India," said one senior analyst at investment bank Nomura.
He believes that the market could go as high as 6,900 towards the end of next year - close to the peak of 6,930 touched at the top of the tech boom in 1999.
Broker Charles Stanley, meanwhile, is predicting that the FTSE 100 will reach 6,700 next year. Barclays Wealth has it at 6,800.
There is also optimism that the mergers and acquisitions boom will continue. M&A activity got back on track in earnest in 2006 after a few relatively quiet years, spurred in the main by private equity firms looking to invest sizeable funds. This is a factor that has contributed to the record City bonuses this Christmas.
"At the moment, there's so much money in the private equity coffers that the next company to be taken out could be anybody," said the Nomura analyst. "Nothing is sacrosanct. Look at Vodafone: it's currently considering buying [a rival company] in India. That's a big fish swallowing a small fish, but there's nothing to say a whale couldn't come along and swallow [Vodafone].
He added: "The only restraint is that private equity investors are showing discipline. They know the market is having a feeding frenzy."
A new survey from accountancy firm Deloitte also predicts a strong year for deals after it found that debt institutions expect leverage ratios to increase. "In the corporate market, 90 per cent of banks, corporates and hedge funds predict leverage will increase or stay the same," said James Douglas, a debt advisory partner at Deloitte. "2007 looks set to be an exciting year for M&A."
Other areas of optimism include currencies, with most hopeful the dollar will improve following its weak end to 2006, and the UK property market.
These upbeat findings come on the back of a report last week from the Chartered Management Institute, which found that most directors contacted for a survey were confident 2007 would be a year of growth, despite fears that business costs would rise.
For all the optimism, there is also a note of caution. How the US economy will perform remains a concern, while in the UK, most economists believe interest rates will move upwards in the new year, by a quarter point to 5.25 per cent. Some believe they could rise yet further if consumer spending this Christmas is better than expected or if inflationary pressures remain. Further rate increases are also predicted for other major economies around the world.
"We have a sense that 2007 is going to be tougher," wrote Barclays Wealth in a recent note on how global markets will fare. "As we move through [the year], further increases in interest rates should start to weigh on households and investors, squeezing down global growth and moderating the potential returns from financial markets."
The FTSE 100 could also be in for a correction after hitting the heights. "6,900 would probably be a very good level to sell out at," said the Nomura analyst.Reuse content