By Jeremy Batstone
Director of Investment Strategy, Fyshe Group
2003 has been a better year for stock market investors than many could have dreamed, but will 2004 follow suit? A leading stockbroker looks at the prospects.
2003 turned out to be comeback year for world stock markets.
The world index of shares returned close to 20%, drawing a line under three years of falling stock markets.
We believe 2004 will be a year in which investors can continue to prosper but they need to be aware of several risk factors looming large.
Firstly, markets expect global and UK inflation to increase in 2004.
As a result companies and individuals will face having to pay higher interest rates.
Many firms, like individuals, have taken on a lot of debt in recent times - and the strain of having to meet higher interest payments could prove onerous for some firms.
If a high-profile firm were to fall, the knock-on effects on investor confidence could cause markets to tumble.
The falling dollar has been welcomed by stock markets as it has helped boost profits and growth in the US.
A balance sheet recovery stateside has meant that merger and acquisition activity has increased in the US corporate sector - a significant factor in the upward movement of share prices.
However, there are hidden dangers in the recent stock market rally.
Some US shares are showing the classic sign of being overvalued.
In short, share prices are accelerating faster than company profits.
In some cases the share price to earnings ratio has reached the levels last seen in 1999 and 2000 at the height of the last bull market, and we all know what happened then.
The fact that we have lived through a share price bubble in the recent past does not mean that we are not going to experience something similar in 2004.
Bubbles are likely to keep happening while central bankers are flooding the world economy with debt.
What is more, ever since September 11 investors have become acutely aware that political shocks can come at any time and hit share prices hard.
For example, Iraq's near term prospects are still uncertain, despite the recent capture of Saddam Hussein.
But OPEC members seem happy to pump out more oil to make up for concerns regarding any Iraqi shortfalls.
However, the impact of events on investor psyche is important.
Geo-political shocks may mean that investors would be best advised to focus on a company's ability to generate cash, implying only modest returns in 2004.
Our best analysis is that the FTSE-100 will end 2004 somewhere near the 4850 level - as of 24 December it stood near 4445.
Stock market growth in excess of 10% would represent an excellent return when compared to a High Street deposit account.
Remember, before embarking on a stock market investment it is always best to get financial advice - and share price growth is far from guaranteed.
The views expressed are solely those of Mr Batstone and are for general information only. They do not constitute financial advice as defined by the Financial Services and Markets Act and are not intended to be relied on for the purposes of making an investment decision. Always obtain independent advice from a qualified, registered financial adviser before making any investment decisions.