STOCK MARKET WEEK : The overseas buying spree that Footsie watchers failed to factor in

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The Independent Online
The incredible, rip-roaring performance of Footsie this year has caught many of the City's highly paid fund managers on the hop.

They, like strategists who attempt to plot the direction of the stock market, are astonished by the heady scramble for blue chips which took the index to within a whisker of 5,000 points.

Despite Friday's disarray, the latest example of the volatility of the stock market, Footsie rose 77.7 points last week. It is, of course, vulnerable to New York; further transatlantic gyrations would damage sentiment.

At the turn of the year NatWest Securities was regarded as rather brave, and in some quarters a little foolhardy, when it predicted the blue-chip index would end the year at 4,600.

A little over half way through 1997 and NatWest's estimate has been submerged in the market's euphoria.

Why have so many experts been wrong footed by Footsie's display? There is no clear cut answer although the growing belief among experienced market men is the fund managers and crystal gazers failed to take sufficient account of the growing internationalisation of world stock markets.

They factored in the impact of a Labour government, perhaps overplaying the possible negative impact, the demutalisation exercises and the underlying strength of the market.

But "Johnny Foreigner" was the buying influence they overlooked.

On the accepted valuation measurements there is no doubt blue chips are expensive. But compared with ratings in many other markets they are cheap. Goldman Sachs, the US investment house, points out that the market's prospective p/e is approaching 17; in Europe the range is 20 to 23.

So, with Britain's stable political outlook and still improving economy, blue chips look attractive to foreigners seeking investment havens.

The overseas buying spree, mainly from the US and Europe with some input from Japan, explains, in part, the yawning gap which has opened between blue chips and the rest of the market. After all, most foreign investors brave enough to chance their arm in what is, in some respects, an unfamiliar market are unlikely to stray from the comfort and protection afforded by blue chips.

Footsie's increasing financial weighting and the conversion stampede are, of course, other large influences in the blue-chip index's strength.

The City's army of bears managed to draw relief towards the end of last week when shares gave ground. But a Dow Jones Average around 8,000 points and Footsie nudging 5,000 is a nightmare scenario for many fund managers and could explain concerted efforts to talk the market down - witness the astonishing up with gilts and down with equities result of the most recent Merrill Lynch survey among fund managers.

It would, of course, be unrealistic to expect the Footsie rampage to continue. Surely a sharp correction, at least 400 points, must be imminent? After all the index has climbed from 4,118.5 since the start of the year.

If the veteran market men have got it right and the old valuation yardsticks will have to be revised to accommodate the brave new international world, then those 5,000 points forecasts could even prove to be too cautious.

There will, of course, be a retreat, perhaps a savage one. Markets have to pause for breath. Providing Wall Street does not produce any nasty shocks; nothing untoward happens on the domestic front (such as a sudden falling out of love with Labour) and there is not an eruption of international tension, then any serious downturn might have to wait until October's tenth anniversary of the great crash. Markets inevitably get nervous ahead of such ominous occasions, fearing a revisitation of the ghosts of past tragedies.

The run-up to the crash is bound to be a time of some anxiety, giving bears, such as embarrassed fund managers and stretched market makers, a heaven sent opportunity to try to get blue chips lower; thereby nullifying the humiliation of costly misjudgements. So be prepared for the chorus of caution to continue.

One of the continuing market talking points is when will second and third liners join the fun. They have lagged behind their blue chip peers, looking increasingly forlorn. Many are confident the gap between big and small will start to narrow.

Simon Smith, head of equities at Albert E Sharp, the nation's largest independent stockbroker, believes they will cease to languish in the doldrums once the holiday season is over and the City swings back into full action.

"We see nothing to change our fundamental belief that smaller companies offer exceptionally good value," he says.

"At this stage of the economic cycle smaller companies have traditionally stood on premium ratings; today they are at significant discounts. Thus the main market either looks expensive or, as we believe, the smaller companies market looks significantly undervalued."

Much of this week's profits attention will be concentrated on Matthew Clark, the country's second-largest cider maker, which last summer was stripped of its go-go share rating after producing a shock profit warning. The shares were pulped from 700p to around 350p; they are now bumping along at 239p.

Alcopops did the trading damage and in the year ended April Matthew Clark rolled out pounds 17.2m against earlier hopes of more than pounds 70m. This time round it should manage pounds 40m, although last week's comments from its big rival, HP Bulmer, indicated it is still feeling the pinch.

Others reporting this week include SmithKline Beecham, a second-quarter slightly higher at pounds 355m; Reuters half-year profits little changed at pounds 340m and Imperial Chemical Industries with half-time profits sharply down at pounds 160m. But things are a changing at ICI. It is being transformed, increasing its speciality chemical side, selling its bulk chemicals. So the results will not have much relevance to the new-look group.

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