Page last updated at 22:41 GMT, Tuesday, 21 February 2006

Can the stockmarket continue to rise?

By Justin Urquhart Stewart
Seven Investment Management

Justin Urquhart Stewart
Justin Urquhart Stewart says the economy is slowing

Well, we can't really complain. When you look at most of the major asset classes, they all seem to have been in pretty good shape.

Whether it's shares, commodities or commercial property, all did well last year.

Additionally, the UK stock market has had a very creditable three years, rising from its nadir in March 2003.

At first glance, good news seems to surround the UK's financial markets.

With corporate profits having recovered from the darker days of 2001, some companies have used these profits to buy back shares from shareholders.

All this corporate activity has added to the bulls' fervour and excitement

Interest rates in the UK and US seem to have reached their peak.

The current rise in the stockmarket has been further fuelled by mergers and acquisitions.

More than 26 companies have vanished from the FTSE 250 since the beginning of 2004, and a fifth of the FTSE 100 is involved in some "mutter from the gutter" around takeovers and mergers.

All this corporate activity has added to the bulls' fervour and excitement as they each try to anticipate the next potential bid target.

Frankly, after having potential bids for something as operationally dull as BAA and as astonishing as Gazprom making noises about Centrica, anything could happen.

Unhealthy lather

Nevertheless, before we work up an unhealthy lather of excitement, it would perhaps be sensible to voice a note of caution.

Although the world economy has done well, the growth outlook in some major economies - including the US and UK - is slowing.

The main props of our own economy, namely consumer and government spending, are inevitably having to pull back in the face of high debt levels and economic constraints.

As equities are supposed to discount future values, then it should follow that at some stage they will have to take account of any slowdown.

However, as the tide of takeovers rises, so it will push up speculative values and the accompanying excitement could mask what could otherwise be underlying weakness - and this will be the problem.

This froth might then, in effect, become a "cappuccino market" - hiding the real value of shares somewhere underneath.

The market is then exposed to any sudden change in confidence - be they such possibilities as weaker corporate results, poorer economic statistics or, more likely, another currently unforeseeable geo-political event.

Market sentiment is fickle - so beware the changes.

In the meantime though, the old market maxim of "the trend is your friend" must still apply.

But hold hard, because at some stage that trend will change and, when it does, you must change with it.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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