Print this article
Britain’s blue chip index has had quite a spring in its step of late. Since the end of April, the FTSE 100 has climbed by 6% to just below 5,100, its highest level since June 2002. Gains have been driven by a five-month run of upgraded earnings forecasts, thanks mainly to the mining and oil sectors, while expectations of interest rate reductions are also helping, notes Chris Flood in the FT. Dividends are expected to grow by 8.5% this year while investors can also expect further share buybacks. Valuations look reasonable, especially compared to bonds given their strong recent run-up; the FTSE trailing PE of 14.5, meanwhile, is close to its historical average. So how much further might stocks go? A poll of 20 market strategists by Reuters last week revealed a wide range of year-end forecasts, with the average calling for further gains of 3.5% this year – although this still implies an 8.5% rise for the 2005 as a whole.
It’s certainly “hard to see why the stock market should race ahead” from here, says Heather Connon in The Observer. With the economy weakening and Europe showing little sign of recovery, earnings growth “will be hard to come by”, especially among the retail, leisure and banking firms that have benefited most from the consumption boom. JP Morgan, whose year-end forecast of 4,750 is the lowest in the poll, takes a similar view. According to strategist Mislav Matejka, consumers’ high debts and increased interest expenses, along with weak house prices, point to further weakness in consumption, while rising unit labour costs amid a tight labour market imply scant scope for companies to boost margins. All this presages disappointment on the earnings front, with the consensus earnings growth forecast of 8% for the FTSE 100 likely to prove over-optimistic. Retailers and financial stocks – which account for about 30% of the index – will deliver most of the bad news.
High oil prices may pose a further headwind, while any cut in UK interest rates could be offset by further monetary tightening in the US, which according to Ian Richards of ABN Amro will drain the liquidity out of global asset markets. Meanwhile, note that those best placed to gauge their companies’ prospects aren’t exactly brimming with confidence, says Gary Duncan in The Times. According to DigitalLook, there has been a surge in share sales by company directors this month, and the trend is accelerating. “Unusually”, in the second week of June, the number of sales actually exceeded purchases.
Published in
Stock markets
| More
articles
by
Andrew Van Sickle
Related articles
-
By Tim Bennett, Jan 30, 2012
-
By Merryn Somerset Webb, Jan 27, 2012
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.