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
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her in Latakia
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific
In this the person to restore our trust in the banks?

In this the person to restore our trust in the banks?

Dame Colette Bowe - interview
When do the creative juices dry up?

When do the creative juices dry up?

David Lodge thinks he knows
The 'Cher moment' happening across fashion just now

Fashion's Cher moment

Ageing beauty will always be more classy than all that booty
Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

Health fears over school cancer jab

Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

'I forgive everyone, but I don't forget'

Fifa president Sepp Blatter issues defiant warning to opponents
Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

Weather warning

Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report