Bankers cut Footsie forecasts

LONDON investment banks are slashing their year-end forecasts for the FTSE 100 index as hopes fade for a sharp share-price rally in the second half of the year. Credit Suisse First Boston, Merrill Lynch, HSBC, NatWest and SG Securities are among those to have lowered their sights in recent weeks or are warning that big revisions will be inevitable if firms' earnings do not improve significantly.

Most banks had tipped the FTSE 100 to finish the year between 5800 and 6000, a rise of about 800 points on last year's close. But America's economic recovery has not flowed through to share prices, with some analysts saying the Dow Jones and FTSE indices could drop further before staging a late comeback.

Several now believe the key London marker will end 2002 at between 5000 and 5200, up some 12% from today. They say some share prices still reflect overly optimistic hopes for strong economic recovery in the US and Europe and will be marked down in line with evidence that the turnaround is slower and patchier than expected three months ago.

Investors were today moving into defensive stocks and those with attractive yields, pushing up the Footsie 126 points to 4756.8. The Dow also provided some consolation, rising 134.64 points or 1.4% to 9608.85 by mid-session.

Merrill Lynch, one of the most bearish banks at the start of the year with a 5500 target, admits even its forecast may prove too ambitious because of the large earnings growth factored in to some stocks. 'My big concern is that the recovery will be below what many people are expecting,' said Merrill equity strategist Khuram Chaudhry.

CSFB, which has already trimmed its forecast from 5900 to 5700, is in the throes of a second revision. NatWest is also rethinking its prediction of 5800, saying it expects to chop 300 points off this.

HSBC equity analyst Steve Russell said his bank's forecast of 5700 could be cut to 5200 if more disappointing profit results emerge in the third quarter. 'I would expect the market to stay where it is or even drift lower on more bad news,' he said. 'But profits should pick up in 2003 so I would expect that to be factored in to share prices towards the end of the year.'

SG, which had eyed 5800, believes 5000 is now 'a reasonable target', saying the recovery in profits would be lower than thought six months ago. Goldman Sachs strategist Peter Sullivan is holding firm with 5500. 'The recovery will be disappointing and is unlikely to provide much of a boost to share prices,' he said. Deutsche Bank's Bob Semple believes the FTSE will bounce to 5600 by the end of the year, saying that earnings concern is misplaced.

Rough ride could last for months