With Christmas and New Year well and truly behind us, and the Atkins Diet taking effect, focus has returned to the Stock Market. With a sense of shock, there is a realisation that shares put in their best performance for several years in 2003. The FTSE 100 Index managed to rise 13.6 per cent. All this looked impossible in March last year, amid the doom and gloom. Since that date, however, the market recovered by 36.2 per cent.
Even on the smoothed view from one New Year's Eve to another, an increase of 13.6 per cent compares more than favourably with cash on deposit. With base rates averaging 3.7 per cent last year, and dividend yields at the end of the year at 3.1 per cent, it only took an increase of 0.6 per cent to beat cash on deposit. The total return of 16.7 per cent, in hindsight, looks very attractive.
That said, the UK was one of the worst performing markets last year, particularly in comparison, for example, with Argentina, which rose by 121.2 per cent. This gives hope that the UK may continue on its upward path in a steady progressive direction.
The retail sector has been in the headlines recently, as food and general retailers update the City on how they fared over Christmas. It has to be remembered that some stores can see almost half of their total annual sales in the six weeks surrounding Christmas. The skill involved in maximising profits for the stores has been the ability to sell as much as possible at full price before discounting to sell off end-of-line stock.
Today sees the start of the end of trading updates, with Somerfield reporting tomorrow. Profits are likely to be about 50 per cent up on last year's undemanding figures, but nowhere near a return to its former glories.
Cracking news at Egg. The majority owner, Prudential, has announced it is in talks with US credit card company MBNA. A sale would give Prudential a healthy return on its investment. With a sale price upwards of £1.4bn, against a book value of £300m, Prudential is set to trouser a massive boost in extra capital for further expansion.
Egg was originally designed to cross-sell Prudential's life products, but underestimated the shrewdness of the general public. With most of its customers taking advantage of its low-margin products, Egg has turned out to be mainly a glorified credit card issuer.
Most analysts are predicting a bright start for the market this year, with a possible fall-off later in the year. The catalyst for any fall would be expected to be interest rates being raised in the US and elsewhere. The US Federal Reserve has stated, however, that core inflation rates in the US are as low as they have been in 40 years, and they are trending downwards. With no inflationary pressures, the message is clear that low interest rates in the US are set to stay. With an overvalued euro, it is unlikely that European interest rates will be raised. Indeed, it is more likely that the next move will be downwards. The impact of all this is that UK interest rates would be expected to remain low for the foreseeable future. Going back to my point about comparing Stock Market returns with cash on deposit, on this basis, the UK market looks very attractive indeed at current levels.
* For investment advice contact Anthony Platts on 01642 608855.
Published: 20/01/2004
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