Earnings forecasts and current valuations, allied with comfortable levels of liquidity, suggest UK e...
Earnings forecasts and current valuations, allied with comfortable levels of liquidity, suggest UK equities are ripe for an upwards surge that could carry the FTSE 100 through the 7000 mark in a couple of months.
However, it is not just the traditional quiet summer that is likely to stop this happening. For one thing the jury is still out on whether the technology correction is over or still has some way to go. Whatever the decision, it will have a knock-on effect.
All market action until September is going to be coloured by indications of whether the US economy is headed for either a soft or hard landing.
The best that can be hoped for over the summer months is the volatility that has characterised the year so far will die down. That may prove a fond hope as long as the technology, media and telecom sectors continue to take their cue from Nasdaq.
Although it is clear the 'best of breed' concept has gained credence with the investing public and IPOs have slowed markedly there could yet be renewed tech fever. Additional complexity will arise if more companies decide, like Dixons, that now is as good a time as any to turn their fashionable offshoots into hard cash.
On the economic front, growth is likely to remain modest at best but good enough to sustain corporate earnings growth forecasts of around 12% for this year and perhaps a shade below for 2001. UK interest rates looked until recently to be on hold for some months. Now the weakening of sterling and the assertion by OECD that rates will have to rise is going to put to the test the sturdy sense of independence that has been shown by the Bank of England's Monetary Policy Committee.
A month ago the interest rate cycle could have been reckoned to peak after another 25 bps rise. Now it is beginning to look like 50 bps - and perhaps more if European rates are increased.
Basic strategy for the immediate future must be to hold fire until the US economy is brought into line by the Fed. At that stage the valuation of UK growth stocks will be enticing and top class technology stocks will again lead the field, now that the market has learned to be more discriminate.
Other than the worries about US economic management the risks are sterling will fall back too quickly for comfort and force another rate rise though, in truth, the MPC have so far ignored the effect their actions might have on the currency. The market may be facing the usual three months of going nowhere but there is a suspicion that 2000 may not be as other years.
Volume has been on the high side recently and this could exaggerate the volatility. A lot of investors may have sold in May but there is no certainty they have gone away. Most will stay close at hand to watch developments in the US.
Douglas Thomson is head of UK equities, Murray Johnstone.
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