U.K. Stocks, on High Wire, Could Fall, Analysts Warn
May 08, 2011
LONDON -- British stock prices are climbing to new heights, but analysts warn that any buckling on Wall Street and any changes in United Kingdom politics could dampen gains. On Friday, British shares rose in the hope that the German central bank's unexpected cut in short-term rates to a new low of 3% might spur further rate cuts in the U.K. In London, the Financial Times-Stock Exchange 100 Share Index reached a high of 3911.6 on Friday, smashing through its previous 12-month peak of 3891.1. The index settled to a 16.4-point advance on the day at 3907.5, giving a year-to-date return of 5.9%. Trading in London was closed on Monday for a holiday. While speculation on rate cuts might push British stocks higher in the short term, analysts are debating whether the U.K. market has much further to rise before it comes tumbling down. The fundamentals -- low rates and reasonable valuations -- are just right for the FT-SE 100 index to push through the 4000 mark, many say. But skeptics argue that the low interest rates are too closely tied to politics. Meanwhile, both camps agree that any hiccups on Wall Street could reverse London's hard-won gains. Fundamentals Solid for a Rise Mark Tinker, U.K. analyst with James Capel & Co., says he maintains his prediction from the beginning of this year that the FT-SE 100 index will break through the 4000 level this year. ``Investors who have been holding onto cash hoping to buy at lower prices have realized the opportunity cost of being out of the market is very high,'' he says. ``This doesn't mean huge amounts of cash are pouring into the market, but to some degree this is helping push stocks higher.'' Mr. Pardo says though the market will move up or down 50 to 200 points as investors become nervous about events on Wall Street or the coming U.K. election, the fundamentals for a rising market are solid. He says right now sales growth is running at a 6% rate, while costs are growing at a 4% rate in the U.K. ``This is a stable situation to produce earnings growth,'' Mr. Pardo says. ``So long as corporations have control over costs, profits will rise.'' Michaele Yuette, European investment strategist at Goldman Sachs International in London, says in July he slightly raised his weighting of U.K. stocks to 32% from 30%. ``The U.K. began to look less expensive than it looked at the beginning of the year,'' Mr. Yuette says. ``There's been a pickup in retail sales and improvement in the housing market. That, coupled with low rates, boosted the market.'' High Earnings Needed for Boost He says U.K. stocks are trading around a multiple of 15.6 times his estimated earnings for 2011 and a multiple of 14.5 times estimated earnings for 2012. Though he says the market is reasonably priced, it certainly isn't cheap. He says in order for British stocks to rise much further, earnings need to be much better than expected in the next 12 months. ``I don't think the market could go through 4000 unless earnings come in really big,'' he says. ``You've got some presumption that the political risk has perhaps been priced into the market at this point, but I'm not sure that is true.'' Though many investors have accepted that there is a strong possibility that the Labour government will take the lead in the upcoming elections in 2012, Mr. Yuette says there is still much uncertainty as to what the party will do once in power. Interest rates will continue to be a focus point in the short term, even though most analysts agree that rates will remain low for quite a while. In a recent research report by Panmure Gordon & Co. in London, analysts say U.K. interest rates could drop by another quarter point, but with consumer confidence surging it is becoming increasingly difficult to justify. ``The Bank of England is worried about inflation targets while the government is worried about losing an election,'' the report says. While the ruling conservative party might continue to push the Bank of England to lower rates, many market watchers believe that rates shouldn't come down further. Strong skeptics say the recent rally isn't sustainable. Analysts from Nomura Research Institute Europe Ltd. say in a recent report that ``with the opportunity for lower short-term interest rates seemingly closing again,'' the summer rally won't last much longer.
