As the euro-era approached, many big investors were said to be knee-deep in cash, waiting to see just what happened when the new currency took effect. And opinions on how the UK equities market would respond were mixed.
Some say the equities market is still beset with worries about the poor state of the domestic economy. But others saw clear signs of the Bank of England's moves to ease credit paying off, with market players and institutions confidently fixing their gaze on future earnings growth.
Directors of corporate UK have been heavy buyers of their own shares, says Philip Wolstencroft, UK equities strategist at Merrill Lynch. Institutional investors have high cash levels, and with falling interest rates they are likely to be ploughing that into the equities market."
But Richard Jeffrey, group economist of Charterhouse, expects concerns about economic weakness to put a real damper on shares, at least at the start of the year. Most Januaries on record have shown a rise in the market, but the first month of 1999 is only likely to witness a modest lift, he says. "The market will remain very nervous about the domestic and global economy and there will be worries about profit downgrades to come."
Max Ward, head of UK equities at Baillie Gifford, agrees, adding that earnings estimates are still too optimistic. Earnings would be flat in 1998 and there is unlikely to be any growth in 1999, he says. This is at odds with market expectations that earnings will rise between 5 and 7% in 1999.
"We think it is still right to be pretty underweight in resources and general industrials," he says. And one should be selective in other sub-sectors, he says, including household goods, textiles and alcoholic beverages.
The FTSE 100 should reach around 5,800 half way through the year, predicts Wolstencroft. "Value is reasonably good and interest rates are coming down - that should help offset weakness in profits." And, with 1999 under way, the market will start looking to 2000 for inspiration. Then at least, the economy should be fairly strong, with earnings per share rising rather than falling, he says.
Jeffrey sees the FTSE 100 reaching a peak of 5,700-5,750 mid-year, assuming it starts at around 5,200. However, stocks will not be able to hold on to those gains in the second half, he predicts.
What happens as the euro becomes the single European currency will be watched eagerly by UK market participants. But the actual impact of the transition on London shares depends on whether sterling weakens or strengthens against the euro, says Jeffrey. "I think the pound will weaken and this might give a bit of a boost to the manufacturing sector," he says. Ward says the euro looks as if it will be a strong currency.
Wolstencroft says the effect of the single currency on the UK market will be negligible. After all, the Bank of England is going to be pursuing its own policy, focused on UK inflation rather than the sterling exchange rate, he says.
Among business leaders and politicians, the pros and cons of joining the single European currency are hotly debated in the UK. But to the market, the subject is more or less irrelevant. "The market just rolls over and falls asleep when it hears about it," says Wolstencroft. Any concerns that UK trade may suffer longer-term through being outside the euro-zone will take some years to knock UK share prices, he says.
But generally, the market views the UK's position as positive for now. "It will become obvious later on that we are much better off out outside," says Jeffrey, adding that the likely bout of initial squabbling over the European Central Bank's implementation of monetary policy will reinforce this view. Rachel Fixsen"