Politics cloud the shares feast


The stock market has been on something of a switchback since the beginning of the year, but the past 10 days have got the bulls going again. The gain of more than 100 points by the FT-SE 100 index from its recent trough of 2,977, hit in early March, has taken the Footsie to within reach of the important 3,100 level.

Technical factors remain relentlessly positive. On fundamental valuation, the relationship with gilts, the outlook for corporate profits and the state of institutional equity, shares look cheap. The cloud on the horizon is the dwindling prospects for the present government surviving beyond the next election.

Oddly, professional investors remain sanguine about the threat of a Labour government. Steve Hall, fund manager at the small, private client broker Pilling in Manchester, concedes that the only bugbear facing the UK market is the political aspect. But he avers that "whatever [Labour] might say, I don't think they are going to be that extreme at all".

Governments now cannot rely on ideology the way they used to. They must now "plough a middle ground" if they are going to raise the revenues to push forward ambitious plans for education and health, he argues.

Ian Harnett, equity strategist at brokers Socit Gnrale Strauss Turnbull, agrees that the political risk has been overdone. "We can actually measure what the political risk of having a Labour government is, because in 1992 we were actually one day away from having a Labour government."

The relief when John Major, against the odds, went back to 10 Downing Street saw the market bounce 250 to 300 points, Mr Harnett pointed out. With the market already on alert for a socialist administration, "it is hard to say that some of the political risk is not already in there. And secondly, this [potential] Labour government is not as red as the previous one was going to be".

The bounce on a return of the Conservatives might be as much as 400 to 600 points on the index, he estimated. "If investors see returns being over twice the size of the downside risk, then it is beginning to look quite a safe bet."

He believes that at the fundamental level, the market is quite cheap, citing the collapse in price/earnings ratios over the past year. From more than 24 in early 1994, the historic p/e for the UK's top 100 companies has slumped to 14.5 now and the prospective is just 11.5.

Others highlight the juicy yields available from the share market. Matthew Orr, a partner in private client stockbroker Killik & Co, said equities were yielding a lot more than their historic average against gilts.

The so-called gilt-equity yield ratio has been in the 1.7 to 2.0 range recently, against a long-term average of around 2.1. So to return to its long-run average, the current prospective yield of 5 per cent on shares should be nearer 4.25 or 4.5 per cent.

Mr Orr believes the market is undervalued by 5 per cent, moving out to 15 per cent a year hence. It will need to move higher to catch up, he said, and "that could be quite spiky when it does happen. It might be quite difficult for investors to get back in".

The outlook for corporate liquidity also favours further strength in the market. Previous high points in 1978 and 1987 saw the equity market rise close to 40 per cent in the period following, as money flowed back to the personal sector.

The fundamentals make Ian Harnett "emphatically bullish" about the outlook for the rest of the year. The next key chart barriers are 3,120 and then 3,150, he said, but beyond that, the Footsie could end 1995 anywhere between 3,500 and 3,700.

Trevor Laugharne of Kleinwort Benson Securities is not expecting much action beyond 3,100 in the short term, but he too believes that 3,500 is a realistic target for the year-end. He warns that what happens in the US remains crucial. Treasury bonds there were in the unusual position of yielding less than their German equivalents. "The worry is there could be a flip-over in that relationship," he said, while the possibility that the Federal Reserve might again raise rates added to that uncertainty.

There was also a threat that US and other overseas investors might start repatriating funds. "When there are shaky markets, people prefer to be in cash and at home".

Perhaps the biggest question mark over the market is what the Chancellor will do in the November Budget. Robert Kerr at Nikko Securities said the economy was being led by investment and exports. Kenneth Clarke could spoil that party. "If we are going to see him putting money back into people's pockets . . . it won't do inflation pressures any favours".

Reflecting that caution, he sees equities ending the year no higher than 3,150 to 3,200.

Start your day with The Independent, sign up for daily news emails
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

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

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

A timely reminder of the bloody anniversary we all forgot

A timely reminder of the bloody anniversary we all forgot

Who remembers that this week we enter the 150th anniversary year of the end of the American Civil War, asks Robert Fisk
Homeless Veterans appeal: Former soldiers pay their respects to a friend who also served

Homeless Veterans appeal

Former soldiers pay their respects to a friend who also served
Downfall of Dustin 'Screech' Diamond, the 'Saved By The Bell' star charged with bar stabbing

Scarred by the bell

The downfall of the TV star charged with bar stabbing
Why 2014 was a year of technological let-downs

Why 2014 was a year of technological let-downs

Security breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Cuba's golf revolution: But will the revolutionary nation take 'bourgeois' game to its heart?

Will revolutionary Cuba take 'bourgeois' golf to its heart?

Fidel Castro ridiculed the game – but now investment in leisure resort projects is welcome
The Locked Room Mysteries: As a new collection of the genre’s best is published, its editor Otto Penzler explains the rules of engagement

The Locked Room Mysteries

As a new collection of the genre’s best is published, its editor explains the rules of engagement
Amy Adams on playing painter Margaret Keane in Tim Burton's Big Eyes

How I made myself Keane

Amy Adams hadn’t wanted to take the role of artist Margaret Keane, because she’d had enough of playing victims. But then she had a daughter, and saw the painter in a new light
Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Parting view of Ofcom chief... we hate jokes on the disabled

Bad language once got TV viewers irate, inciting calls to broadcasting switchboards. But now there is a worse offender, says retiring head of the media watchdog, Ed Richards
A look back at fashion in 2014: Wear in review

Wear in review

A look back at fashion in 2014
Ian Herbert: My 10 hopes for sport in 2015. Might just one of them happen?

Ian Herbert: My 10 hopes for sport in 2015

Might just one of them happen?
War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?