Brokers Bullish despite Warnings of Economic Slowdown ; BUSINESS ANALYSIS
Andrew Dewson; Michael Jivkov, The Independent (London, England)
As the FTSE 100 once again marched higher yesterday, stockbrokers across the City predicted yet more gains for equities in 2007, driven by corporate activity, benign economic conditions and strong newsflow. London's blue chip index has registered a 10 per cent advance so far this year, closing 55 points higher at 6,245 yesterday. This comes on top of the 17 per cent jump the FTSE 100 enjoyed in 2005 and leaves it trading within a whisker of its highest level for six years.
Of strategists polled by The Independent, only two believe that the index will end 2007 lower than it currently stands.Hargreaves Lansdown, the Bristolbased broker, is most bullish on London shares and expects the FTSE 100 to hit 7,000 before the end of the year. That would be a new high for the index, a level not seen since December 1999 when the blue chips hit 6,930. Investors will certainly be hoping that Lewis Charles Securities does not prove to be one of the top forecasters next year. The broker is predicting the FTSE 100 will close 2007 at 6100, showing no growth over the year. JP Morgan is even more bearish with a 5850 forecast, the lowest of the brokers surveyed.
However, most strategists view UK and European markets as good value and expect a continued re-rating of equities. The price to earnings ratio of the London market, about 12.3 times forecast 2007 earnings, remains close to historical lows.
"We expect European stock markets to continue to rally in 2007. Valuations are supportive for stocks with a generous yield gap compared to bonds," said Lehman Brothers' strategist Ian Scott in a research note previewing the year ahead. He also expects plenty more mergers and acquisitions over the next 12 months pointing out that M&A activity in Europe is well below levels seen back in the start of 2000.
Alongside City analysts, money managers are also upbeat about UK and European stocks going into the new year. Paul Feeney of Gartmore Investment Management said: "Next year we expect market conditions to continue to favour equities. Although its likely that global economic growth will be slower in 2007 than in the last couple of years, overall the growth trend should remain positive."
Mr Feeney believes that although short-term interest rates have increased in a number of markets, long-term rates remain at historical lows with plenty of liquidity in the system. This is particularly significant as it means banks are still going to be happy to lend money and provide the financing for private equity buyouts and M& A deals that have been a key driving force behind equity gains in 2006.
After a poor year, brokers are also expecting better things from the largest UK companies in 2007. BP and Shell both look like ending the current year in the red, as do HSBC and Glaxo-SmithKline. Investec Securities is looking for a rotation of money into the largest stocks. Merrill Lynch expects to see the emergence of consumer consumption in developing markets as an important trend but believes the dollar will remain weak. Common themes across broker outlooks for 2007 include expectations of another mild market correction during the year and caution over the banking sector. …