Where there's brass there's an index rise

Susan Marshall (SM) talks to Mark Gardner (MG), fund adviser at Julius Baer Investments, about the reasons for the FT-SE Index reaching record levels last week.

SM: The FT-SE has hit eight records so far this year already. What is driving the index up?

MG: Primarily it is liquidity in the market. There are a lot of UK funds under pressure to reduce their cash positions; from holding as much as 8 per cent cash to around 5 per cent, according to a survey by Merrill Lynch. So it's weight of money that's behind the rise.

SM: Why are fund managers choosing stocks in favour of other investments, and why UK stocks in particular?

MG: There has been some re-evaluation of the effects of the Asian turmoil. We have seen domestic funds moving into sectors like pharmaceuticals, banking and property where you can get good earnings growth and which are insulated from the downturn in Asia. In addition, people have found fourth-quarter figures from companies with Asian interests have not been disappointing, as expected. So people are feeling more optimistic there.

SM: The market has already been pushed along by a lot of merger talk, and some actual mergers. Will this continue?

MG: Yes. We had numbers from SmithKline Beecham last week, which were quite robust on their own, but if they combine with Glaxo Wellcome the research and development budgets of the two groups together will be phenomenal in size: $2.5bn (pounds 1.47bn). The options that would give the merged company for development in genomics and combinatorial chemistry and new drugs mean that other companies in the industry will be forced to respond in order for them to be able to compete in future.

In the financial sector there is also pressure for further consolidation despite the dashed hopes last week of a merger between Barclays and NatWest. The banks all have very high levels of cash; the Woolwich, for instance, has just announced the payment of a special dividend which sent the shares soaring and that is a sign of the pressure for consolidation.

SM: Are the earnings good enough in themselves to justify the share prices?

MG: The results from Lloyds TSB were phenomenal - the growth has largely been driven by a reduction in the cost/income ratio. Barclays figures disappointed the market, and the shares suffered a setback, because the results were knocked back by the closure costs of BZW and by disappointment on the merger story. Looking beneath the headlines the figures from personal banking and business banking were reasonable.

SM: Can we break the euphoria in UK stocks?

MG: You might see some profit-taking in the short term. But IBES estimates show that the UK does not look particularly expensive on a 12 to 18-month view, compared with other European markets. UK shares did not do so well compared with rest of Europe last year. People are also looking to stories on share buy-backs and restructuring, both of which will be big drivers of the market in the months to come.

SM: What sectors are you looking to invest in?

MG: We are very conservative and unoriginal. We like property stocks - British Land, where you will get operational gearing uplift; pharmaceuticals such as SmithKline Beecham and Glaxo; also retail banks, where Lloyds is the big favourite.

We think people are going to look at food retailing in due course. Those four sectors are going to see consolidation.

You could argue that the valuations on these groups look stretched already, but recent work by Schroders showed a lot of UK funds have been underweight in these sectors that have outperformed in the last year. The funds that have lost money in engineering and diversified industrials will be under pressure to bite the bullet at some point, take the losses in industrials, and switch to more momentum-oriented shares.

SM: Are we looking at another increase in interest rates this year?

MG: This is a very tough call in the sense that the manufacturing economic data is not particularly robust while labour market pressure is building up, which could push up earnings. The consumer side also is still reasonably strong. But, on balance, I don't see a rise in rates in the near term.

SM: Will we see a cut in rates this year?

MG: I think rates will stay on hold for the foreseeable future.

Copyright: IOS & Bloomberg

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

'Queer saint' who bankrolled artworld giants

British culture owes a huge debt to Peter Watson, says Michael Prodger
Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

Pushkin Prizes brings countries together

Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
14 best kids' hoodies

14 best kids' hoodies

Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

The acceptable face of the Emirates

Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk