Worst could be over for shares, say analysts

The worst could be over for the battered London stock market and investors could be looking forward to a sustained bounce back, it was claimed today.

The fragile market has been in decline for the last two years and in turmoil during the past months, slumping heavily in reaction to bad news from the US such as the WorldCom accounting scandal.

Last month it dived to a six year low of 3777.1, wiping billions from the value of equities and causing misery for investors who have savings tied up in index-linked funds, pensions and endowments.

However in the last few weeks the market has staged a mini-rally, pulling back from its lows after being inspired by similar rises on Wall Street.

It closed tonight at 4434.7 - 17% above its nadir last month.

The gains have led to speculation the bear market is over and investors could now be looking at a sustained rally.

Although most analysts are cautious about saying the worst is behind us, there are some who think we could be out of the woods.

Most economists have pared back their expectations of where the Footsie will finish this year but despite this a number are forecasting the market will continue to make gains from its current position.

A sustained rally in the Footsie, as well as causing cheer for investors would help corporate investment which in turn is good news for jobs as well as boosting the feelgood factor.

Among the more optimistic analysts is Danny Gabay, UK economist at City investment bank JP Morgan, who said it was possible the Footsie could continue to rally this year _ and could even rise another 15%.

A rise of that amount would take the Footsie to above 5,100.

“That is not impossible, given that we are fundamentally optimistic about the global and UK economy,” he said.

He said a slowdown in the housing market could buoy equities, by taking away one channel of saving and making the Footsie a more attractive investment.

He added that the markets had “massively overreacted” to problems in the US, but had been given a boost by the passing of the recent accounting deadline for executives to vouch for company accounts in the US.

Around 700 US firms had to testify that their accounts were truthful and accurate and only a handful highlighted problems with figures.

Mr Gabay said: “I think the markets got spooked by corporate America. But the deadline (for accounts) came and went and we are clawing back to where we were.”

He said he thought the rally was sustainable, adding he did not anticipate any further large falls.

“I don’t think we are going to see any more sharp falls, I think the rally will continue but going further from there will become tougher and we will need more good profit figures and economic data.”

“I think three weeks ago we were in the eye of the storm. But the nightmare is over and I think we are over the worst.”

However not all analysts are so optimistic.

Henk Potts, equity strategist at Barclays Private Clients, is pencilling in a trading range for the Footise this year of between 4,000 and 4,600, and is forecasting it could end the year at around 4,000.

“A prolonged rally would be difficult to achieve given the current economic climate and corporate profitability,” he said.

And Alex Scott, analyst at Seven Investment Management was also cautious.

“I would tend to think (the rally) is not sustainable. It could go on a little while but the concern has got to be that the economic fundamentals are not there to justify it.

“It will probably continue for a while and could rise even 5% or 10% but I think there is a fair chance as data filters through that it could run out of steam.

“It is too early to call a rally. The risks are still there that it could go back lower before going higher.”

“We are not out of the woods yet – there are still risks in the economy and the political situation which could interrupt the progress of the rally.”

Merrill Lynch is also cautious, and is forecasting the Footsie to be around 4,500 by the year end.

Jeremy Batstone at NatWest Stockbrokers said he was expecting to shave his current year-end forecast from 5,500 to around 5,000.