Running of the share bulls

STOCK market bulls are looking towards the New Year with eager anticipation. Share prices in London have surged 34% since hitting a seven-year low in March, and it is hoped that 2004 will signal the start of an economic revival. There are signs that the recovery is under way, led by America where long-awaited tax credits have given fresh spending power to the consumer.

Equity markets have also been spurred by evidence of an increase in takeover activity and stronger corporate profitability. The London stock market reached its low point of 3277.5 on 12 March and has since been on a roll, led by private investors after a three-year absence.

Only last week, the FTSE 100 index of leading shares closed above 4400 for the first time this year, touching a 15-month high of 4410. Could the Baghdad Bounce be a sign of better things to come, or is likely to be another false dawn?

London has been a laggard compared with other leading markets. Frankfurt has grown 33% since the start of the year, while the Paris Bourse is up 14%. Hong Kong has risen by 33% and Japan and Wall Street have both put on 18%. The year-on-year rise in London is only 11%.

The chink of champagne glasses can be heard in the boardrooms of banks on Wall Street and in the Square Mile as they toast a steady stream of mega-deals that will earn them a fortune in fees. Some say this may signal the return of the fat bonus for City workers.

On one day alone, £40bn worth of mergers and takeovers were announced in New York. It was the highest level of corporate activity on a single day since February 2000, at the height of the technology-boom. This growing enthusiasm to ?do deals‘ is seen as another prop to investor confidence after three years of slim pickings.

But Jeremy Batstone, head of research at stockbroker Fyshe Group, fears the confidence may be misplaced, and is not impressed with the multi-billion-pound deals being lined up.

?Much of the improvement in corporate profitability has come from cost-cutting,‘ he says. ?Now those companies want to use the profits to make acquisitions and extract further costs benefits.‘

Batstone insists there is little evidence of companies generating wealth organically and, with interest rates on the rise, that can only be bad news for companies and the stock market. Blue-chip companies have performed badly this year, investors showing little appetite for the Footsie, which is heavily weighted towards the banking, oil and telecom sectors. So the best gains have been among second-liners and smaller-cap companies.

There has even been a revival among technology stocks - some have doubled in value. Take internet booking service lastminute. Its share price has almost quadrupled since the spring.

The company continues to lose money and trades on a prospective price-earnings ratio of minus 34. Lastminute still has a lot to prove and brokers agree the current rating appears to discount a lot. It seems we have learned little from the collapse of the technology sector that left investors sitting on some huge paper losses three years ago.

Brokers say investment strategies are now focused on capital gains rather than income. The US economy grew at its fastest rate in two decades during the third quarter. Brokers in London point out that growth in the States is fuelled by tax breaks and big-spending consumers. They say that cannot be sustained.

Investors, however, seem happy to focus on good news and ignore anything that may undermine confidence.

Tony Craze at stockbroker Goy Harris Cartwright says he is surprised that the Footsie has sustained some of its recent gains. ?Too many companies come in with a drop in profits and people justify it by saying they were better than expected,‘ he says. ?Companies are achieving profits growth by cutting back on costs or making acquisitions, not by growing the business.‘

He says there is still value tucked away, but it is sometimes buried deep. ?In these markets, you have to identify where that value is and move quickly to take a profit.‘

Despite the new optimism, those stock market bulls may find the going tougher than they expect in 2004.

Coming back

BRITISH Airways will make its return to the list of blue-chip companies that make up the FTSE 100 index in next week's quarterly review.

This will be third time in two years that the national carrier has been listed among Britain's top 100 companies. Since hitting a low of 86p in March, the shares have bounced back, closing today at 229p.

It is likely to be joined in its Footsie comeback by business support services group Hays (value £2.19bn) which lost its place earlier this year.

They will replace pubs chain Mitchells & Butlers and financial services outfit Provident Financial.

Invest with care

I FOUND myself in a minority of one at a City lunch. It was attended by a clutch of financial journalists and brokers who argued that there is a new-found confidence in sentiment and were adamant that the stock market revival is under way.

High-spending consumers appear unconcerned with last month's quarter-point increase in base interest rates. They are comforted by rising property prices and the fact that even the City has begun taking on staff again in anticipation of a pick-up. My colleagues claimed the real money will be made in the technology sector, which they expect to lead the revival.

After listening to them for a while, it became clear that none had any blue-chips or mid-cap companies on their shopping lists. All their selections were based on small-cap operations, which usually trade in thin markets and are notoriously volatile. The message from the City is that while it is always advisable to lock in profits whenever possible, investors would do better to think long-term.

A lot can still go wrong. The Americans are raging bulls, choosing to ignore the plunging dollar and a huge trade deficit. The Federal Reserve may be forced to tighten its belt at some stage. So it is best to be invested in the likes of BT, Unilever and Lloyds TSB rather than Dotcom Boom Plc - just in case everything does go pear-shaped.