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Investment View: Smile on the FTSE face

Not so very long ago, it looked as though the FTSE 100 index would struggle to stay at the 5,000 level.

But the UK stockmarket has gained in strength and shown its resilience by proving immune to the London bombings and the upward spike in the oil price which followed the death of King Fahd amid longer-term concerns over the Saudi succession. Last week, 5,300 was comprehensively challenged. Is the outlook really so good to offset these geopolitical events?

The truth is that these unrelated happenings are likely to have only a short-term influence on share prices. What we need to watch more closely are those indicators that point to the longer-term direction of shares. Recent good company results and the generally robust economic data we are seeing all serve to underscore a much more benign environment for equities.

Even more important is the fact that the run of good news is bringing a smile to the faces of fund managers. Confidence is returning and the talk today is much more of how far this bull run will extend than whether or not a profit-taking opportunity is being created. It all feels rather as if we are back in a proper bull market. Not so long ago, though, there were many who considered the bounce back from the early 2003 lows had run its course.

Sound results from businesses on both sides of the Atlantic and economic data suggesting the world economy is in good shape has caused investors to reconsider the outlook. Valuation ratings are coming down and risks appear moderate. True, it is the US continuing to make the running while the eurozone still lags. But in China and India, growth continues unabated.

Yet the UK economy looks strangely out of step with this rosy big picture at present. Growth is slowing and the Treasury looks as though it may be expecting too much for 2005. Fortunately, such is the international nature of Britain’s businesses that the implications for company results and share price performance may not be too dire.

Given that equities remain the most interesting game over the longer term, should we accept that this new-found confidence is here to stay and throw caution to the wind? Or should we be circumspect and acknowledge that the higher the market goes, the greater the risk in staying invested? There is merit on both sides of this argument.

There is little doubt that investment managers are beginning to enthuse over prospects in a way we have not heard for some while. This is not the enthusiasm borne out of riding a wave of recovery, rather a realisation that the rebalancing of portfolios from equities to bonds that so distorted the market may be coming to an end. The fact that companies are increasingly cash-rich supports the belief that corporate activity will continue to rise.

The market will, of course, travel too far. It always does. But perhaps we are getting a proper reason to establish equities once again as the asset class of choice. They certainly should be considered a proper alternative to buy-to-let property. The prospect of all those self-invested personal pensions being filled with residential property post-A-day – perhaps on borrowed money – does not bear thinking about.

In the near term, the trick must be trying to work out where to position oneself in the world of stocks and shares. Perhaps now is the time to look again at the Far East. There have certainly been more than a few false dawns in Japan but even here optimism is returning. It is time to do my homework.


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