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Economic Rebound Imminent - HSBC

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Economic Rebound Imminent - HSBC

Old 3rd Sep 2001, 12:55
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It seems all this doom and glooom may soon

EXPERTS are predicting a stock-market rally in the coming months that could lead to the market rising by 21% by the end of the year.
The big City investment banks are united in predicting that the market will be higher by the end of December, despite its recent drubbing and a succession of profit warnings.
Last week, the London market took another battering when falls on Wall Street sent share prices tumbling. The FTSE 100 index of the biggest shares finished the week at 5,345 - near its three-year low.
Although experts are unwilling to say that the market has hit the bottom, most expect considerable progress before the year ends. Everything, however, depends on a recovery in America, which would help to propel the British market out of its current lows.
Steve Russell, a British equity strategist at HSBC, said: "We anticipate a market rally as we pass through the low point of the American cycle in September and October. The recent downturn in Britain's market is being driven more by negative sentiment in America than domestic woes."
HSBC expects the FTSE 100 to hit 6,500 by the end of the year - one of the more optimistic predictions.
An upturn in the American economy may, however, seem improbable in the wake of all the bad news that came out of Wall Street last week. On Wednesday the American government reported the slowest economic growth in eight years. Gross domestic product figures for the three months to June were revised down to 0.2% from 0.7%. Investors took this as a sign that a recovery was still a long way off.
But expectations are growing that the Federal Reserve's policy of aggressively cutting interest rates could start to have an impact on the American economy.
America's central bank has cut rates seven times in the past eight months - so far, to no effect. But historically, the benefits of lower interest rates have taken six to nine months to filter through to the economy.
Hasan Tevfik, equity strategist at Credit Suisse First Boston, predicts an end-of-year level of 6,000. He said: "The interest-rate cuts in America will start to feed through over the next few months. This will signal a turnround in the American economy and will boost the markets in Britain and Europe."
Private investors already in the market are advised to sit tight. Historically, some of the sharpest rises occur just after the market hits its low point, which even the finest minds in the country cannot predict with any accuracy.
Anna Bowes of Chase de Vere, an independent financial adviser, said: "There is no point trying to time the market by selling out and then buying back in when you think the time is right. The market is always full of surprises."
The bottom of the current downturn was initially called back in March. It caused the FTSE 100 to rally by more than 10%. But prices quickly fell back after it became clear that worse news was still to come.
Hilary Cook of Barclays Stockbrokers said nervous investors should stay out of the market until the economic outlook is clearer. "We expect the FTSE to be at 5,900 by the end of the year. There is upside from these levels, but it is going to be a rocky ride."
Jeremy Batstone, head of research at NatWest Stockbrokers, is even more cautious. Although his company is predicting an end-of-year FTSE level of 6,300, he believes this may be difficult to achieve given current market conditions. He said: "I can't see the markets moving out of this range because corporate profits will continue to be eroded."
Even so, Batstone believes there is money to be made from shares for braver investors. He favours defensive stocks such as utility firms and drug companies. Even though these have performed well over the past 18 months and now look expensive, he said it was too early to move into cyclical shares that would benefit most when the economy staged a recovery.
When there are signs that the economy is stabilising, investors are advised to start buying stocks such as housebuilders, chemical firms and engineering companies, as these should be among the first to feel the effects of a pick-up.
But even if the market rallies, investors should not expect the returns they have enjoyed over the past two decades.
Low inflation means prices are expected to rise more slowly than in the past, with most experts predicting returns of much less than 10% a year.
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