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Investment View: FTSE loose and fancy free

You would have thought that now was the time to wax lyrical over something other than the UK stockmarket. Property, perhaps. Or alternative investments – surely becoming one of the most overused of terms.

The emerging markets of Eastern Europe are worthy of a mention and Japan has been rewarding investors over recent months. Do not forget China either, where third-quarter GDP growth was an impressive 11.3 per cent.

All these are worthy of mention but the fact remains that our domestic stockmarket has been something of a star of late. Regaining all the ground it lost during October in a few short days, the FTSE 100 looked as though it had 5,500 in its sights as last week began. As for the FTSE 250, fresh highs have been achieved recently as bid fever travels down the capitalisation tables. For equity investors, happy days seem to be here again.

This renewed confidence is not solely about M&A activity. A mini results season is under way, with those companies that operate to March 31 year ends reporting their half-year figures. Just as US third-quarter figures were tending to come in ahead of expectations, so there have been few disappointments so far at home. Even the airlines have been painting a rosier picture, despite higher fuel costs. Corporate Britain looks in good shape – for now.

Fuel costs are, however, becoming an issue. While you might reasonably expect transport companies to have been hit by the dearer oil price, many businesses are highlighting how higher distribution costs are impinging on the bottom line. Of course, the fact that oil is down by more than 20 per cent from its peak provides some justification for the greater optimism that currently exists. Even so, not all the statistics we are seeing provide a positive contribution to the overall picture.

Manufacturing output in this country is a case in point. The second successive monthly downturn disclosed in last week’s figures highlight the difficulties being faced by this still important sector of the economy. In contrast, manufacturers in the US and eurozone are posting year-on-year growth in excess of 2 per cent. Little wonder the CBI is demanding more emphasis to be placed on the private, rather than the public, sector of the economy.

As for house prices, Land Registry figures suggest 2005 could deliver the lowest volume of house transactions for 30 years, despite an upturn in new mortgage lending. It seems hard to believe that the price of the average house in London has topped 300,000 for the first time. People are clearly moving home less often but presumably still feel comfortably off because of previous price inflation. Only the high street is suffering as people adjust their spending rather than up their borrowing.

Fortunately, the UK market is receiving support from overseas. After a patchy period, US economic data is beginning to strengthen. Even continental Europe looks set to deliver rising growth, spurred by a weaker euro. Remember, the FTSE 100 is a global collection of businesses, so the health of the domestic economy is of less significance when it comes to judging likely trends in profitability.

One danger lurking in the background remains pension liabilities. The takeover of Marconi demonstrated how the interests of pensioners could take precedence over those of shareholders. Accounting for these liabilities will be a knotty problem for finance directors and will doubtless be exercising the minds of regulators. The extent of individual company pension needs are likely to be something of a matter of opinion. It will make valuing businesses that much more difficult.


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