The week ahead: With more cash chasing fewer shares, the bull run is not over

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The Independent Online
NEVER before have blue chips enjoyed such a majestic run. In only 10 weeks Footsie achieved a near 20 per cent advance and has just about doubled in the past four years - comfortably its most outstanding display in its 14 years existence.

Such a performance has, probably for the first time, silenced the bears. After being proved wrong so often they have, at least for the time being, decided to keep their collective heads below the parapet.

Clearly such heady progress cannot continue. But there appears to be a growing feeling that over the next few years shares, particularly blue chips, will make further headway. Some strategists are banking on Footsie at 6,600 by the end of this year and there is even talk of 8,000 as the millennium dawns.

Andy Hartwell, strategist at SG Securities, says: "We are standing potentially on the threshold of a golden age for equities, particularly as Europe adopts further reforms to its pensions system and, with that, rebalances portfolios away from bonds towards equities."

He sees Footsie at 6,000 points at the end of this year and standing at 6,300 at millennium time.

Bob Semple and David McBain at NatWest Securities are also on 6,000 for this year. They say: "The bull run is not yet over. Looking out through 1999 the market will run to fresh highs."

As Mr Hartwell indicates, the sheer weight of money seeking a home will be a significant influence. Institutions are flush with cash. Some cash mountains have grown on the back of a reluctance to believe in the bull market; the continuing preference for cash rather than shares in takeover bids; the stream of special dividends and the seemingly unending march of share buy-backs.

London - shares and sterling - is currently regarded as an ideal haven for overseas cash and the advent of the euro next year could even enhance its appeal still further.

Another often overlooked factor is the dwindling pool of shares. Besides the greater use of cash in takeover bids, shares are disappearing in the relentless pursuit of share buy-backs.

So pundits may huff and puff about the economy running out of steam. Some dismal souls even suggest a recession could soon be in play, but more and more cash chasing fewer and fewer shares represents a compelling argument for the continuing strength of equities, always assuming New York does not misbehave.

Much of this year's progress appears to stem from institutional investors rushing to try and recapture the potential rewards they squandered by sitting complacently on the sidelines as the bull market romped ahead.

The arrival of Halifax and the rest and the raging speculation among financials, making up around 30 per cent of Footsie, was responsible for much of last year's progress. This year's advance has been more evenly spread.

And, unlike last year, mid and small cap shares have enjoyed the bullish embrace. They were neglected for a long time. So if, on historic measurements, blue chip valuations may seem stretched there is still plenty of old fashioned value on the stock market under card.

Indeed such has been the bargain hunting that small caps actually achieved the rare distinction of outperforming their blue chip peers last month.

A few hiccups occurred last week, leaving Footsie and the mid and small cap indices below their peaks. But, it could be argued, shares needed to pause for breath after their earlier heroics. The question is; for how long?

The long bull run has wrong-footed the formidable army of strategists. Even the more optimistic have, in fact, been too pessimistic as they underestimated Footsie's strength.

Messrs Semple and McBain are among those looking for a period of consolidation. Mr Hartwell, faced with the inevitable question how much better can it get, says the answer depends on your time scale. In the short term probably not a lot; longer term we may be on the threshold his "golden age".

The four days of this week may not offer much of a guide to the future. The shortened Easter weeks are not noted for their stock market displays. Many big hitters are away from their desks and, with some exceptions, most of the corporate action that does occur moves into the public domain to the dismay of those involved. They would much prefer to wait until the stock market is once again in full swing.

Only one blue chip is scheduled to disturb the expected lethargy. Associated British Foods' six-month figures are unlikely to create much excitement.

The seemingly inexorable strength of sterling and the sale of ABF's Irish supermarkets will erode profits; a decline from pounds 194m to around pounds 180m is possible.

Mind you, ABF has the ability to produce a surprise. It is, following its Irish sale to Tesco, cash-rich and has the ammunition to mount a big takeover bid.

A strike at sugar group Tate & Lyle has long been rumoured. ABF's existing sugar operations would ensure monopoly problems. Still, there is a suspicion that if ABF was prepared to argue its case it could obtain clearance.

It has made at least two attempts to raid its pounds 1bn-plus cash pile, bidding for Dalgety's agricultural products side and Elementis' malts business. Each time it was outbid.