Shares to power on: Brighter outlook and falling interest rates inspire confidence in stock market

Equity strategists are predicting a surge in the stock market well into the new year as interest rates fall further and the economic outlook brightens.

Shares soared to new highs last week amid fresh indications of rising consumer confidence in the run-up to Christmas. Retailers reported a late surge of buying, while Barclays Bank disclosed a 'significant' increase in credit-card spending in December.

Shares were in sparkling form before Christmas, with the FT-SE 100 Index peaking at 2,845 on Tuesday. Indices covering the FT-SE 250 and FT-SE 350 also recorded their best- ever performance. On Christmas Eve, the FT-SE 100 ended 0.1 up at 2827.5.

However, market strategists are cautious about the later stages of 1993, with most predicting that the FT-SE 100 will be little more than 3,000 by the year-end. Nomura, the Japanese securities house, sticks out like a sore thumb with a forecast of 3,500.

Several leading City economists caution against expecting a rapid climb out of recession and believe the market may be running ahead of itself. They suggest that the recovery will be tortuous enough to prompt further cuts in interest rates, despite official caution in recent weeks.

'Monetary policy may be eased again, of course, though probably over the heads of official advisers,' says Bill Martin, chief UK economist of UBS Phillips & Drew. 'A cut to 6 per cent base rates is possible in the first quarter.'

Goldman Sachs believes that 'the sluggishness of output growth in the first half of next year should eventually produce further reductions in rates'. It adds: 'We expect base rates to be cut to 5 per cent during next year.'

A similar view is held by another leading broker, Greenwell Montagu Gilt-edged. And even Warburg Securities, which is more optimistic about the strength of recovery than other forecasters, expects a fall to 6 per cent base rates.

The City expects Treasury worries about the inflationary impact of a weak pound and sharp cuts in rates to evaporate if the recession persists. 'If the economy doesn't pick up, the Government will simply cut interest rates - and possibly the pound - until it does,' says Warburg Securities.

BZW's Richard Kersley is one of the more cautious equity strategists, fearing that the market could overshoot in the early part of 1993. He forecasts a spate of rights issues, as companies finance recovery, and a slowdown in the economies of mainland Europe - both impediments to a massive leap in shares in 1993.

Also worrying for the second half is the financing of the public sector borrowing requirement, which Mr Kersley fears will balloon to pounds 52bn. UK institutions will have about pounds 37bn in cash to spend this year, but they never put more than two-thirds of their money in gilts, he says. 'This means a lot of money will have to be found from the overseas and personal sectors for the Government to finance borrowing.'

Gerry Evans at County NatWest is another who believes the markets have anticipated a new year surge. He says the current run will not last beyond early February.

At Nomura, Nick Knight thinks much of this thinking is misguided, if not completely wrong. 'You should not be asking me why I am so optimistic, but why the others are so pessimistic,' says Knight. 'The world is looking pretty good at the moment.'

Good industrial news from the US and an expected fall in German and UK interest rates mean the world economy is poised for recovery in the second half, he says.