View from City Road: Gilt-edged forecasts hit the bin

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The Independent Online
WHILE majority opinion in the City has turned decidedly optimistic about shares, notwithstanding unchanged interest rates yesterday, a significant minority are still arguing in favour of gilts. Confidence in a long-run bull market is far from universal.

Few investors or analysts have changed their views so abruptly as Nick Knight of Nomura, once the arch-pessimist, who has quietly binned a document he wrote in January this year that was headed: '1992 - A farewell to equities.' Then he forecast that the FT-SE 100 index would be 2,500 by the year-end and investors would be better off leaving their money in the bank than buying either shares or gilts.

In the event he was proved wrong for the first half and has abandoned the forecast in the second. In the six months to June, UK investors in shares saw a return of 11 per cent, almost a full percentage point above bank base rates over the same period, while UK fixed interest stock - gilts - produced a hefty 19.4 per cent return.

Now Mr Knight is forecasting that the FT-SE 100 will be 3,000 in three months' time and will rise a further 500 points next year. Other stockbroking firms may be more cautious but most are confident of a strong rise over the next 12 months.

Nearly all now regard talk about a switch from shares to gilts, much debated in the City earlier this year, as old hat. With higher inflation in prospect it has become irrelevant, they say.

But Norwich Union, the insurer most publicly associated with the move to gilts, is sticking to its argument, set out in December 1991. While Philip Scott, the senior investment manager, agrees that the immediate outlook for corporate earnings has improved with devaluation, he says the medium-term outlook for bonds remains good.

Pointing to the US experience of low interest rates, he says the risk of much higher inflation is small, even with one or more cuts in interest rates. Consumers and companies are still reeling under the burden of heavy borrowings, making a boom unlikely.

Throughout this year Norwich Union has forecast that equities would continue to outperform bonds in the 1990s but it also believes the gap will be smaller than in the 1980s. Even now it could be proved right but foreign investors in particular are likely to remain cautious about gilts.

Pension funds would prefer to take the risk of concentrating 80 per cent of their assets in shares than lose out on the rise in the stock market they now confidently expect.

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