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Investment view

Well, we managed to hold on to the 4,200 level at the beginning of last week. Inevitably, there was a little profit-taking but as the holiday weekend approached we seemed to be holding our own.

Sufficient excitement was generated to have a number of commentators talking this market up by another 15 per cent for the year end. Much as I would love to think that possible, it is perhaps time to take a more realistic view of what investors might expect for the rest of 2003.

Cast your mind back to the start of this year. The FTSE 100 index stood at just a whisker under 4,000. With the poor conditions that prevailed during the early weeks of the year, it was easy to forget that the market had been as high as even that. By the start of March, it was down below 3,300. Indeed, the fall in the value of the index was not far short of 20 per cent. Four thousand at the end of 2003 had felt pretty low but after the disastrous pre-Gulf War dip, even the recovery to back over 4,000 looked like a respectable bounce.

We are now in a situation where the stockmarket stands at around 6 per cent above the level at which it ended last year. The rise from the low point has been an impressive 30 per cent but the progress made for the year as a whole has been insufficient to take us out of danger of seeing yet another down year. Fortunately, the recovery is being underpinned by company results that are coming in ahead of expectations. Even so, no one that I can think of could put their hands on their hearts and say shares are truly cheap.

For valuation levels to fall to the cheap side of the long-term average, one of two things needs to happen. Either profits have to rise significantly or the market needs to fall. No one wants the latter to happen so we must try to determine whether the former is likely or even possible. The signs are mixed but by no means negative.

On the wider economic front, there is little cheer for investors. Numbers from the US are holding up but concern remains that the recovery will be anaemic. Over the other side of the English Channel, the situation seems to be deteriorating, with France joining Germany and Italy in posting negative growth. Only the Far East is demonstrating that the Asian Tiger is fit and well. China continues to power ahead and even Japan is at least looking as though it might succeed in returning to a growth tack.

Longer term, the health of the economies of the Far East will be crucial. Their big populations and the aspirations they hold should take much of the pressure from an increasingly indebted Western consumer. We still need middle America to keep spending for the time being. Given the productivity gains achieved in the US, if the recovery there is sufficiently robust, then profits could indeed get a real boost.

One of the barometer stocks for corporate well-being published its results at the end of last week. WPP, one of the world&#39s biggest advertising agencies, disclosed that both revenue and profits were down. But it did have some words of encouragement to deliver to shareholders – the ad market in the UK continues to be depressed but things were just beginning to pick up in the US. Comforting signs indeed.

But perhaps the most encouraging sign is the re-emergence of the private investor. Aside from the widely reported uplift in retail trading volumes, some IFAs of my acquaintance are reporting that their clients are once again prepared to consider equity investment. Perhaps it is just concerns over the alternatives – after all, the long end of the bond market has taken a modest bath while property has undoubtedly stalled – but this is the best news I have received in a while.

Even so, I would still caution against believing that this market can challenge 5,000 by the year end. For that to happen, more than a few economic miracles would need to take place. If the FTSE 100 index can hold above 4,000 and perhaps even establish a new trading range of 4,200 to 4,400, then at least the run of negative years will have come to an end. Who knows, perhaps enough potential will remain for us to make money in 2004 as well.


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