Legal & General's Rough predicts 21% bounce in FTSE 100 next year

The FTSE 100 is set to end next year more than 20 per cent up on present levels, one of the City's leading investment practitioners forecast yesterday.

David Rough, the outgoing investments director of Legal & General, is predicting that the depressed blue-chip index will close 2002 at between 6,000 and 6,200, an increase of between 17 per cent and 21 per cent on yesterday's close of 5,136.

A year ago, Mr Rough forecast that the FTSE would end 2001 at 7,250.

"We got it wrong along with everyone else," he said yesterday. "Fundamentally we misunderstood the size of the bubble that developed in the Western economies in the late '90s. The explosion of that bubble has taken much longer than anticipated."

The latest estimate assumes that UK economic growth will accelerate in the second half of the year, with base interest rates being ratcheted up to 5 per cent.

"I wouldn't say the worst is over, but we have found out what the worst is in terms of economic activity. If rates are at 5 per cent at the end of next year, that would assume a very strong [economic outlook], in which case the FTSE could be even higher," Mr Rough said.

Shares in commercial property companies, such as Land Securities, were likely to lead the upswing, Mr Rough said. Commercial property had been the best performing investment over the last three years and would continue to outperform, while property stocks were cheaper than they were three months ago.

Selected information technology and telecoms stocks within the battered techMARK index would also outperform, as would asset management groups because of their exposure to a general market recovery. A likely bottoming of the manufacturing recession boded well for industrial stocks, while the Government's fulsome public spending programme would boost some services companies.

The UK stock market was also capable of receiving an expected tidal wave of share issues in the first half of 2002, with companies battered by this year's downturn expected to raise as much as £12.5bn for rebuilding their balance sheets.

However, L&G conceded that UK equity valuations were already based on challenging earnings forecasts, which looked justified because the economy was set to outperform.

"Equities have to deliver the bacon over the next year to justify their levels. We believe they are capable of that," said Andrew Clare, L&G's financial economist.

The risks came not from the US, which was on course for a recovery by the spring, but from continental Europe, where inflation was likely to fall rapidly to damage the outlook for corporate earnings. The US economy was in for a sustained, if muted, recovery, which should see Wall Street gain up to 11 per cent throughout the year. Japanese equities could rally as much as 20 per cent, although gains were likely to be more than obliterated by a collapse in the value of the yen.

Mr Rough, who steps down from the L&G board at the end of the year, is among the City's leading activist. British Telecom, Schroders and Marks & Spencer have been the subject of his attacks over business strategy and questionable corporate governance. Yesterday he lamented the present lack of miscreant companies.