Whats in store in 2004

published 31 October 2005

Chalk up a good year for equity strategists, says Sophie Brodie in Financial News. While most market forecasts over the past few years have proved excessively bullish - in 2002 the average forecaster overestimated the FTSE 100's year-end level by over 40% - 2003 marked a "dramatic improvement" in accuracy. The average FTSE 100 target for 2003 was 4,549, only around 4% above the present level. What's more, chastened by their performance in 2002, they are predicting only modest gains for 2004: the average year-end target is 4,735 - 7% above current levels. Deutsche Bank is again among the most optimistic forecasters, with a target of 5,000, while Merrill Lynch is the most bearish for the second successive year, with 4,400. Strategists expect the S&P 500 to post only a small advance after leading the markets' rise in 2003 and eurozone stocks to climb by 8.4%, with France's CAC40 notching up gains of over 10%.

Experts expect the FTSE to be buoyed by a strengthening economy and profits, but gains may be tempered by rising interest rates, which could crimp growth by increasing borrowing costs and thus reducing spending, says The Sunday Times. Meanwhile, Merrill Lynch notes that the proportion of cash in institutional portfolios is high, providing more potential fuel for an upswing. And according to chartist Richard Lake of Brewin Dolphin, the FTSE is "in a positive trend" so could hit 4,750 by June. But on the macroeconomic front there is cause for concern, says Daniel Ben-Ami on www.Morningstar.co.uk. Not only is consumer debt at record levels - hardly good news with monetary tightening on the horizon - but historically high corporate debt will force companies to strengthen balance sheets by clamping down on expenditure or slashing dividends, neither of which bodes well.

Ultimately, given the close correlation between UK and US stocks, the FTSE's fate in 2004 may hinge on America, says the Investors Chronicle. And there is limited upside on Wall Street: the S&P 500 is on a "bloated" p/e of 30, far above the long-term average. Although US profits have risen sharply this year, thanks to "remarkable fiscal and monetary stimulus", these will eventually be withdrawn, making it unsustainable. And improved earnings have been spurred largely by cost-cutting, not revenue growth, said Philip Coggan in the FT. The dollar's slide also poses a threat - foreign investors are likely to demand higher bond yields to offset the fall, which would slow the economy. More ominously, "the casino is in full swing again", says Alan Abelson in Barron's. The average daily trading volume on the Bulletin Board - a system for small stocks - now exceeds one billion shares, double 2000 levels. If that was certifiable mania, "what is this"?