Shares poised for slow ascent

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The Independent Online
CITY brokers are forecasting a gentle bull market for equities in 1995, helped by low inflation and strong corporate growth. Most predict the FT-SE 100 index of leading shares will close 1995 at or above 3,500, up 14 per cent on Friday's year end .

That would be a sharp improvement on 1994, which saw it tumble 10.3 per cent to 3,065.5, confounding projections a year ago that it would have reached 3,600 by now. Some brokers are warning that the markets will continue to be bearish before turning around in the second quarter.

The new year will also see lots of corporate activity, predicted Paul Roy, who takes over as chief executive of Smith New Court today. After slashing borrowings during the recession, many companies now find themselves cash- rich at a point in the economic cycle when expansion by acquisition is particularly attractive, he said. There would also be a good supply of new share issues.

The optimism for 1995 is largely founded on projections that both inflation and interest rates will remain low.

Bonds and equities are currently equally attractive, say most of the brokers. Relatively stable interest rates should keep the yield on a 20-year gilt at almost 8.75 per cent, according to Adam Cole, the UK economist at stockbroker James Capel. Strong GDP growth - estimated by most to range between 2.5 per cent and 4.25 per cent - will help many companies improve their earnings per share and should boost dividends, he argued. "The driving force will really be earnings."

Improved profits will reduce price/earnings ratios from 18 to as low as 12. At that level, they will be cheap buys, said Michael Hughes, head of economics and investment strategy at BZW.

Some brokers see growth in the United States as a major force dragging London upwards. Others warn that if inflationary pressures in the US run out of control, higher interest rates will cross the Atlantic and push City prices down.

Edmond Warner, head of strategy at Kleinwort Benson, said: "Towards the end of the year a lot of the clouds that have been hanging over the markets will be dispersing. US interest rates will have peaked and their economy will be cooling down. The UK equity market will be dragged along.''

However, Nick Knight, head of strategy at Nomura, sees rising short rates in the US and a possible sell-off of mutual funds pushing global markets down,with the FT-SE 100 index falling to 2,800. "By the fourth quarter the Footsie could bounce back to 3,200. But that's a bit of wishful thinking on the upswing."

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