Resolution Asset Management chief investment officer for UK equities Peter Reid believes the FTSE 100 will break its all-time high of 6,930 next year, with the bull market set to continue until at least 2009.
He believes that market performance will be driven by firms continuing to enjoy supportive valuations, good investment returns, strong profit growth and large amounts of free cashflow.
Reid points out that the market has remained inexpensive over the last four years due to minimal rerating, with valuations rising in line with profit growth.
He expects the pace of profit growth to slow but believes valuations will remain supportive for the short term. He also expects the surge in merger and acquisition activity to continue unabated, with firms using their strong balance sheets to fund deals.
Reid points to inflation as the only reason for investors to be cautious, with rising house prices and consumers remaining highly indebted. But he believes high inflation will dissipate as power prices slide and interest rates rise, slowing consumer spending.
He says weakness of the dollar is likely to impinge on UK profits, with a third of them coming from across the Atlantic, although he feels US interest rates are unlikely to climb as the world’s biggest economy achieves a soft landing. He does not expect the US sub-prime crisis to spread to the wider economy.
Reid says: “We are about two-thirds of the way through the current bull market and there are probably another two years remaining.
There is still upside to go and I think we will see the market push through the old high of 6,930 at some point next year. As the bull market matures, we should expect occasional corrections after rapid periods of gains but these should, for the time being, be viewed as buying opportunities.”