Spotlight turns on to second liners as the City awaits a retreat

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The Independent Online
With blue chips hovering around their best levels and the Footsie surely on the verge of topping the magic 4,000 points, the cries for investment caution are growing louder.

Even Richard Jeffrey, of Charterhouse Tilney, who has been advocating 4,000 for some time, reckons the stock market is now looking fully valued.

He says: "While this does not rule out further progress this year, we believe that higher ground will be hard to defend."

And a raft of leading strategists take the view the market has peaked and will fall in the remaining months of the year.

They are either prepared to ignore the possibility of the traditional Christmas rally or foresee a sharp decline and then festive joy from a lower base.

Last week, at a time Footsie was seriously challenging 4,000, NatWest Securities pointedly reiterated its 3,700 year-end forecast and said clients should sell into strength.

ABN Amro Hoare Govett is also on 3,700 and UBS is shooting for 3,800. Goldman Sachs expects Footsie to fluctuate in a 3,650-3,950 range for the rest of the year.

Such views may bring some comfort to arch bear, Tony Dye, fund manager at PDFM. He has already unsettled his clients by banking on cash rather than equities and missed the bull market.

But to make the Dye philosophy plausible and - more importantly - rewarding, a dramatic retreat is necessary. Few experts are prepared to talk in terms of a pending crash; they prefer "correction" which could mean a modest Footsie retreat.

David Schwartz, an expert follower of the market who is based at Stroud in Gloucestershire, seems in tune with the policy of the PDFM investment chief.

In his latest newsletter he again warns that the next big share move is down.

"Many long-running historical trends continue to send a very clear message - that the UK stock market is at or very close to its high point for a bull market," he declares.

But, hedging his bets, he adds: "As most investors know, history also teaches that the market doesn't always play by our rules.

"The fact the odds favour a down-move does not guarantee one will occur... the favourite does not always win at the races."

One of the influences Mr Schwartz cites for his bearishness is the "five- quarters rule". The market looks like completing the remarkable achievement of moving higher for a record nine quarters in a row.

This century there have been only 12 gains which ran for five quarters or more.

Mr Schwartz observes: "As far as this indicator is concerned, history is signalling very low odds of further rises occurring in the near future." After each of the 12 gains, shares disappointed for at least the next nine months.

He points to the rally which followed Britain's ERM retreat four years ago. When, after five heady quarters, shares ran out of steam, prices fell sharply for a time and then experienced a weak nine-month run.

Should blue chips give ground, is there a case for switching into second liners?

The FT-SE 250 index, covering the next batch of shares after the 100 Footsie stocks, had a splendid run in the first four months of the year, peaking in April. Since then it has not matched its peer index and is still 140 points from its high.

At Panmure Gordon, strategist Ian Williams is pondering whether the so- called mid caps can fight back.

As the economy grows it should be positive for companies with high domestic exposure - and there are proportionately more outside Footsie.

So the move back to second liners, he concludes, could be the story for next year.

Allan Collins at stockbroker Redmayne Bentley is inclined to agree. "With profits now being taken in the leaders, it may be that attention will switch to the mid-cap and take the 250 index up to challenge the peak," he says.

The interim profits season has, so far, not caused any anxiety. This week's reporting list is rather less crowded than in the past two weeks.

Guinness holds centre stage. There are worries about the strength of the spirits market. Michelle Proud and Graeme Eadie at NatWest point out that for the past six half-year periods Guinness has showed a decline in spirit profits.

But they add: "We believe we are now close to the point where we will see a change of direction, with spirits profits turning back upwards."

They do not expect any change this week but suspect an upturn could occur in the second six months and feel "there is now potential to be surprised on the upside".

An advance "will trigger a spell of share price outperformance much needed for a stock which has underperformed the market by 20 per cent over the past year".

Profits are expected to emerge around pounds 350m, a rather sober 3 per cent advance. The dividend, however, should be lifted by, say, 10 per cent to 4.6p.

Bernard Arnault, the French tycoon with more than 20 per cent of Guinness, is, no doubt, not the only shareholder dismayed by Guinness' share performance.

He has suffered the additional hit of adverse foreign exchange movements. There is a belief he would like to end, or at least dramatically curtail, his Guinness share involvement and, if NatWest is on the right lines, he could have an opportunity to reduce his interest.

He has already placed one batch of shares and could be looking in the short term to cut his stake to at least 15 per cent to help finance his other business ambitions.

Others reporting this week include Inchcape, where around pounds 80m at the half-way stage against pounds 83.3m is expected, and housebuilder Barratt Developments, with year's profits of pounds 50.5m (pounds 47.1m).