The biggest market recovery in a decade has left shares overpriced given the existing state of the U...
The biggest market recovery in a decade has left shares overpriced given the existing state of the UK and other major economies, warns Richard Prew, Henderson's director of UK equity retail growth.
"The market has rallied too far for the fundamentals and the more this continues until the year end, the more difficult next year looks," he says.
Prew says he expects corporate profits growth to be near nil in 2003, compared to the census forecast of 13%.
True, some big-cap firms are already importing improvements in turnover and profits on a quarterly basis, and directors buying shares in their own companies now outnumber sellers by 17-to-1.
However, Prew says the gains in sales and profits stem from increased market share rather than growing sectors, and directors buying their own shares is likely to come to nothing if, say, the US economy extends its slump.
"Corporate spending is moribund globally as businesses have little incentive to hire, invest or advertise," Prew says.
"We are in an era of slow growth and low inflation in a world characterised by overcapacity, the effect of which has been to remove corporate pricing power, lower returns on capital employed and lead to widescale retrenchment."
Equity returns over the next few years are unlikely to rise above 7% to 8% as was the case in the 1950s and 1960s before the inflationary shocks of the 1970s, Prew says.
Besides the economic uncertainty, the geopolitical uncertainty will result in a risk premium that will depress share prices as the Cuban Missile Crisis, assassination of JFK and the Vietnam war did in the 1960s.
Prew says he will only be a "happy" buyer of stocks when the FTSE is "within touching distance" of 3,600-3,700 points.
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