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Up, up and further to go

SHARE prices broke through new highs last week, topping their previous all-time peak in February 1994, and - coincidentally - the unit trust industry reported a further surge in net investment in July to pounds 901m, the highest figure since June 1994. Bearing in mind the small investor's tendency to sell when units are cheap and invest when the market is near or at its peak, it is an appropriate time for private investors to review their investment strategy.

Is the market likely to peak right here, and should the wise investor be looking to take some profits and take capital out of the market ready to dribble it back in when prices have been shaken out?

The probable answer to both questions is no - not right now, at least. For all sorts of reasons, the index looks set to go on rising for a while. Looking at the long-term trend of the FT-SE 100 share index, the 15 per cent drop in prices from the previous peak looks more like a shallow valley than a rift, and this week's peak is part of an ongoing recovery from the recession of 1990/91 rather than a separate peak.

So will it continue? The growth of company profits may have slowed, but the flow is still strong. The economy is slowing down, but the rate of growth is still above the average of the past decade, and the current trade deficit is not really a problem. Indeed some analysts are talking of a resurgence of growth next year on the back of tax cuts.

Even if there is no rebound in the growth rate of the economy, inflation is unlikely to fall back to zero in the forseeable future, and the Government is unlikely to achieve its target of cutting inflation excluding mortgage rates below 2.5 per cent in the life of the present Parliament.

Bond markets might get nervous about this and start to rock the boat. But commodity prices are past their worst, UK wages are unlikely to surge while unemployment and job insecurity stay high, and a floating exchange rate should enable the UK to equalise internal and external pressures.

So long as inflation growth is measured in decimal points, there is no reason why the real economy should be as obsessive about inflation as the Bank of England has to be in its self-styled role as keeper of both the Government's and the market's conscience on inflation.

The threat of a premature rise in interest rates has receded, and although the public sector borrowing require- ment is still historically too high to justify overt reflation, the Chancellor has very little choice but to cut taxes if not this November then certainly in 1996, which should be in time to avert a slide back into recession.

In these conditions, the stock market does not look overvalued. The average yield on the top 100 shares is 4 per cent, and is just over twice covered by earnings. The average share costs 15 times its annual earnings, which is well below the historical highs in the inflationary 1970s, when prices were bid more than 20 times annual earnings as investors took refuge from endemic inflation.

Overseas investors, especially in the US and Japan, currently regard the UK as a good place to invest, and scarcely a week passes without the buzz of takeover rumours that almost always accompanies a rising market.

This does not mean that everything is set fair for all time. With a finely balanced mechanism such as existing world economies, potential disaster in the shape of recession, demand inflation or debt deflation is never far away if those economies get out of kilter or governments relax their eternal vigilance and confidence comes under attack.

But equally there is no reason to believe the peak has been reached just yet.