Now that we have finally seen the back of politics for the next four years, attention turns to the actual state of the UK economy.

The year so far has been one of mixed fortunes. Generally speaking, company results have been very good and, in most cases, above consensus estimates.

The state of the high street, however, is no longer boom, but gloom.

Retailers are finding conditions tough as shoppers rein in spending. This is a consequence of the slowing housing market and tax creep.

The City may not have wanted another Labour Government and the tax policies involved, but a continuation of the status quo, albeit with a reduced majority, is one of certainty. As previously mentioned, the City does not like uncertainty.

Why is this? The answer is reasonably simple. Share valuations are based on the ability of companies to increase dividend income payouts year on year. This ability is dictated by the profitability of companies.

The skill of a company analyst is to estimate future profitability to provide an estimate of future dividend payouts. In looking into the future, factors such as taxation need to be taken into account. If these are unknowns, then the estimates lose their level of accuracy and become guesses at best.

The recent setbacks in the market have been described by some as a necessary evil. If the market continually goes up, day after day, there comes a time when buyers sit on the sidelines awaiting lower prices. This is exactly what has been happening since the middle of February.

By the end of last month, this had led to the FTSE falling back to its level at the start of the year.

With value priced back into the market since then, the buyers have been tentatively flushed out and the FTSE is showing signs of a further upward push. Market timing is easy with the advantage of hindsight, but most buyers have been waiting for the election result before showing the colour of their money. Cash levels are at a relative high and, at some stage, will need to be fed back into the market.

Does cash have to be invested? No. Although a return close to base rates at 4.75 per cent does not seem spectacular, the capital is not at risk if held on deposit. Holding cash is usually a temporary tactical move used by investment managers, having hopefully sold at higher levels with the intention of reinvesting at lower levels.

A phrase used to describe this action is "keeping the powder dry". The danger of this kind of move, though, is missing out if the market moves sharply upwards.

There is little in the way of results this week to provide any great impetus to the market. A lot of companies are using the week to host annual meetings to provide shareholders with an opportunity to question the board of directors.

Today sees the North-East's largest home-grown company report interim results. Sage is the last surviving FTSE 100 technology group. The software maker has already signalled that it will deliver a 16 per cent rise in half-year pre-tax profits to £101m and a 17 per cent increase in revenues to £381m. It is important that I point out that Brewin Dolphin are brokers to Sage Group.

* For investment advice contact Anthony Platts on 01642 608855.

Published: 10/05/2005