Optimism bodes ill for share prices

By Mike Verdin BBC News Online business reporter

How they dreaded the end-of-year period, those well-feathered, two-legged beasties who saw their numbers thinned significantly last month.

Yes, for City analysts it was judgment time.

Robin Bone: Interest rate boost

Yuletide turkeys were barely cool in the roasting tray before financial gurus were grilled by bosses, investors and journalists over the accuracy of their share forecasts for last year, and asked predictions for 2003.

And the good news was that an overwhelming majority of observers forecast that the FTSE 100 share index was set to rise.

Prophets lost

The bad news is that history shows analysts' FTSE predictions to be, all too often, crystal balls.

A year ago the consensus forecast was for the index to close 2002 at about 6,000, instead of the 3,940 recorded.

For 2001, investment banks including Morgan Stanley and Salomon Smith Barney foresaw the FTSE rising more than 20%.

The index actually fell by 16%.

FTSE FORECASTS

David Schwartz, JP Morgan: 4,700

Artemis, Gartmore: 4,500-800

Morgan Stanley: 4,600

Credit Suisse, Schroders: 4,200

Merrill Lynch: 3,950

The stock market gloom of the last three years obscured the foresight of even seasoned visionaries.

Yet there is a consensus for a FTSE close of 4,200-4,600 at the end of 2003.

A remarkable degree of consensus, some would say, amid such financial volatility.

"You could say that as a statement of confidence, or you could say that no-one wants to stick their neck out for fear of getting it cut off if their forecast goes awry," one bank insider says.

Beside bears, bulls and stags, sheep might be added to the menagerie of City terms.

Reasons to be cheerful

Still, there are compelling arguments for the FTSE to emerge at last from a period of - excuse more Square Mile jargon - "negative gains".

For one, the tentative slowdown in the housing market may, ironically, lead to better times for companies.

"It is the housing boom which has prevented the Bank of England from reducing interest rates," says Robin Bone, investment analyst at the David Aaron Partnership.

"A cooling in the housing market could allow lower rates, which would act as a stimulus to the rest of the economy."

Strong government spending should "underpin further improvement" in Britain's economic performance, adds Hilary Cook, investment strategist at Barclays Private Clients.

"[Chancellor] Gordon Brown has shown he is going to spend his way through this downturn," Ms Cooks says.

"That is one reason why we are more optimistic for the UK economy than [major] European ones."

Follow the leader

The US economy, the world's biggest, is also poised for encouraging growth, boosting prospects for trade partners such as the UK.

What is even more important is how far shares have tumbled - 45% from their peak at their lowest point last year

David Schwartz

Analysts at the Centre for Economics and Business Research think-tank have revised upwards to 2.5%, from 2.2%, their forecast for US economic expansion this year.

"Tax cuts should encourage consumer spending, and the continued growth in public spending should also provide economic support," says Douglas McWilliam, CEBR chief executive.

"The effects of the weaker dollar are beginning to be felt in terms of helping exporters."

Fourth time lucky?

Furthermore the City is, belatedly, bowing to history, and citing precedence when predicting a brighter 2003.

Analysts who, during the late 1990s stock market bubble, claimed that a "new economic paradigm" meant historical patterns no longer applied to share values, have conceded that the past may, after all, be a guide to the future.

Only twice in the last century have shares fallen for four years in a row.

And the UK has, in 2000, 2001 and 2002, suffered three consecutive years of share slides.

"Are those falls significant - yes they are," says David Schwartz, a stock market historian.

"And what is even more important is how far shares have tumbled - 45% from their peak at their lowest point last year."

Only in times of world war, or severe economic disruption such as the Great Depression, have shares failed to turn after such a severe fall.

Mr Schwartz, one of the few to warn two years ago of the turmoil to come, sees the FTSE ending up 20% at 4,700.

Bear case

Nonetheless, there seem rich pickings too for the bears predicting another year of share gloom.

David Schwartz: Importance of pessimism

Bells on High Street tills are believed to have jingled less in the run-up to Christmas than retailers had hoped, while forecasters at accountant Deloitte & Touche see dole queues lengthening by a quarter this year.

Observers such as Neil Woodford, fund manager at Invesco Perpetual, believe that the 1990s share bubble was so extreme that it has further to collapse, with share values still high when compared with historical averages.

And the horizon is, after all, clouded by the prospect of war, a US-led conflict against Iraq.

Strength in weakness

Furthermore the City may, ironically, be too positive for an imminent share turnaround to be likely.

Mr Schwartz is among those who have, previously, told BBC News Online that share revivals typically take root in deep-lying pessimism.

And he admits that, currently, there is still "plenty of optimism around", including his own.

This despite the acreage of gloomy headlines this year has already provided.

Deloitte. for instance, has predicted sluggish UK economic growth, the CBI warned of accelerating City job cuts, and official figures shown that corporate profitability has fallen to its lowest level for 10 years.

Roll on the bad news.

It may just bring us the rock bottom on which shares can build their recovery.