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Last Updated: Friday, 29 December 2006, 15:33 GMT
Buoyant year for FTSE and pound
Stock market information broadcast outside the London Stock Exchange
Shares have been heading one way this year
A welter of takeover activity pushed the FTSE index of leading shares nearly 11% higher in 2006 while the pound made substantial gains against the dollar.

The index of top 100 shares closed the year up 602 points at 6,220.8 after a buoyant year's trading.

A series of foreign takeovers of British firms including P&O and BAA pushed its value to a five-year high.

Sterling gained 14% against the US dollar as interest rates rose in the UK and the US economy slowed.

Sterling gains

Sterling is now worth $1.9678, compared to $1.7187 a year ago, the biggest annual increase in 16 years.

Some analysts believe sterling will hit the $2 mark next year for the first time since 1992, but this is likely to hinge on whether UK rates rise again early in 2007.

The stock market is on a relatively low valuation compared to the level of interest rates
Andrew Bell, Rensburg Sheppards

"The pound is likely to gain support in the early months of 2007 from expectations that UK interest rates will rise further," said Howard Archer, chief economist with Global Insight.

Despite the US slowdown, which is affecting British companies with substantial exposure to the US market, leading companies generally have a lot of cash at their disposal and many have been buying up businesses.

This activity, in turn, has pushed up the prices of leading shares.

Future perfect?

Analysts said this trend was likely to continue in 2007, potentially heralding another good year for investors.

"I am quite optimistic about the UK market," said Andrew Bell, an equity strategist at Rensburg Sheppards.

"The stock market is on a relatively low valuation compared to the level of interest rates and companies appear to be cash-rich, and so the wave of takeovers is likely to continue next year."

Some experts believe the index may top its previous all-time high of 6,930.2 - recorded on 30 December 1999 - next year.

But a hike in the rate of borrowing, and any sudden rise in oil prices due to instability in the Middle East, could limit gains.

"We should have a cool towel round our head and not expect big telephone numbers next year," Mr Bell added.

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