FTSE 'bullish' as shares outperform house prices
Investors in the London stock market were hoping for another bullish year today after a strong rally in 2005 saw the FTSE 100 Index rise 16.7% and shares outperform house prices for the first time since 1999.
Soaring metal and oil prices pushed mining stocks and energy stocks up as the index of leading shares reached a four-and-a-half year high of 5647.2 yesterday before retreating 19.5 points today to end the year at 5618.8.
The FTSE 250 Index was also in good shape, ending the year at just below yesterday’s all-time high of more than 8800.
Analysts hailed it as “an exceptional year” which far outstripped expectations in the City for the top flight to creep forward just 6% to 5100.
Among the best performing stocks of the year were housebuilder Persimmon, which rose more than 80% from 691p to 1258p and gained entry into the FTSE 100 Index for the first time, and oil and gas explorer Cairn Energy, which lifted more than 75% from 1090p to 1920p.
Many predicted further gains in 2006 with some forecasting the FTSE 100 Index to reach 6200, although others were less confident. The consensus of nine brokers interviewed by The Press Association was 5944.
The last 12 months saw shares outperform house prices – which rose just 3% in 2005 – for the first time since 1999, while bumper dividend payments and more share buy-backs further bulged investors wallets as companies returned profits to shareholders.
Mark Dampier, head of fund research at Hargreaves Lansdown, said dividend payments were up 10% compared with an expected rise of nearer 4% given an inflation rate of around 2%.
“And they look set for a similar increase next year with things looking pretty robust at the moment,” he said.
Hilary Cook, director of investment strategy at Barclays Stockbrokers, said the trend of returning profits to shareholders marked “a shift in corporate culture” with companies now “more shareholder friendly”.
Increased takeover activity, which saw shares in mobile phone firm O2, ports and ferries group P&O, and drinks giant Allied Domecq make serious gains in 2005, is also tipped to continue next year.
Graham Secker, UK equity strategist at Morgan Stanley, said: “We expect merger and acquisition activity to remain a key presence in equity markets next year.”
He said one of the reasons was that companies preferred to “buy not build”.
“Companies can often quickly enhance their earnings by acquisition, in contrast to a much slower return profile associated with capital expenditure.”
And a further cut in interest rates – thought by many economists to be coming as soon as February – could provide more encouragement for the London markets.
Hargreaves Lansdown head of equities Richard Hunter forecast 2006 to be “prosperous” for investors, with the FTSE 100 Index hitting 6000.
He added: “The potential easing of interest rates, continuing merger and acquisition activity and strong corporate earnings would all provide good reason for investors to get involved in 2006.”
Mr Hunter said a return in consumer confidence could give a much needed fillip to the embattled retail sector, which was one of the worst performers of 2005 up just 1% as shoppers deserted the high street and sales slumped.
But ABN Amro analyst Lars Kreckel countered: “It is too early to call the consumer comeback.
“There is little sign of improvement, and further disappointment is likely.
“Near-term caution is essential. But buying prior to a possible second half recovery could pay off.”
Despite his doubts over the retail sector, Mr Kreckel said he was “bullish” about prospects for the wider London market and forecast the FTSE 100 Index to reach 6200.
But broker Morgan Stanley was far more cautious, predicting it to stay flat at around 5600.
Mr Secker said: “Although we believe the UK equity market is approaching a peak in profitability, the main driver of our subdued outlook for 2006 concerns the possibility of a growth slowdown.
“In our view, the market is somewhat complacent in its expectation for growth in GDP and earnings in 2006, and we believe that there is a greater probability of downside disappointment than upside surprise.”
Forecasting the FTSE 100 Index to reach 5900, CMC Markets trader Ian Griffith said: “I think we will see growth in 2006 but not on the same scale as this year.
“The London market has completely outstripped the US indices this year.”
