Stock market week: An exuberant start to the year prompts a rethink by forecasters

Twenty-six trading days into 1998 and already many Footsie year- end forecasts are looking decidedly limp. As if surprised by its own audacity, the index displayed just a hint of vertigo on a few occasions last week. Even so it still managed a triumphant close on Friday, achieving yet another peak of 5,629.7. At the start of the year it was riding at 5,135.5.

Of course, much can happen before the line is drawn on Footsie at the end of December. It is, however, not surprising that the exuberant start to the year achieved by blue chips is prompting second thoughts in some quarters.

The way the stock market has ridden out the Asian storm as well as the strong pound and its threat to earnings has impressed many observers.

Then there is, as outlined last week, the weight of money argument. Institutions are over-burdened with cash, and takeover bids and share buy-backs are adding to their towering money mountains.

And equity growth is stunted. Buybacks and the preference for cash rather than shares in takeover bids are taking their toll of the stock of shares. Flotations and cash-raising exercises do not seem to be sufficient to replenish the store.

This year's exhilarating run has once again been a blue chips party. Although supporting shares are displaying more determination with the Midcap and Smallcap indices hitting new highs, it is Footsie that continues to make the running.

Within Footsie it is once again the financial, drug and utility constituents stoking up the excitement. Stockbrokers are convinced the often frenzied demand for financials heralds some mighty corporate action.

Although many fund managers remain reluctant to buy domestic stocks they are frightened of missing the possible bonanza and are prepared to chase bank and insurance shares. The four building societies which converted into quoted banks, plus insurer Norwich Union, are adding to the Footsie excitement.

Most fund managers, despite strenuous efforts, remain underweight in Alliance & Leicester, Halifax, Northern Rock (expected to go into the index next month) and Woolwich, as well as Norwich. They are desperately keen to improve their holdings. But they are having a tough time with many private investors reluctant to sell.

Even Abbey National, which pioneered the move from building society to bank nearly nine years ago, has yet to accept the institutional embrace, with an astonishingly high 58.6 per cent of its capital still held by private investors.

The stampede to increase building society exposure has prompted some dramatic price surges. Halifax ended last week at 929p (after touching 938p); the shares started the year at 764p.

Private investors hanging on to their windfall shares no doubt draw encouragement from Abbey which, of course, is still subject to anxious institutional interest. When Abbey floated, members got either 100 or 200 free shares and could apply for others at 130p. So former members are sitting on handsome gains, with the shares closing last week at 1,285p after touching 1,312p.

With the Glaxo Wellcome/ SmithKline Beecham pounds 100bn-plus merger underlining that 1998 could be the year when mega-deals become commonplace and Footsie still cheap on the international Richter scale the temptation to adjust Footsie forecasts is understandable.

Two who have increased their target are Bob Semple and David McBain at NatWest Securities. They have moved from 5,700 points to 6,000.

As Footsie is based on company capitalisations, its composition is examined every three months. On present form there will be some dramatic changes after next month's revision, with computer group Misys and Northern Rock joining the exclusive club and, possibly, Dixons among those shown the door.

Another famous retailer, Body Shop International, the Gordon and Anita Roddick creation, also looks in danger of being expelled, not from Footsie but from the supporting FTSE 250 index.

Top names feature in this week's results programme with British Airways on the runway today with three-quarter figures. Around pounds 80m is expected compared with pounds 113m in the same period of 1996. BA's shares are overshadowed by its bid to overcome the regulatory hurdles confronting its planned deal with American Airlines. It is not expected to say much about AA today but there are growing hopes it will achieve the necessary Brussels clearance soon.

Another overshadowed by external events is Reuters, which has to contend with an investigation into one of its US offshoots. It is likely to offer year's figures of pounds 690m against pounds 701m.

British Petroleum should produce final quarter net income near to pounds 620m (pounds 322m) and Shell's final quarter net income is forecast to be little changed at around pounds 1.3bn. BT is in line for a third-quarter profit of pounds 780m, down from pounds 944m; BOC should chip in with expected first quarter profits of pounds 105m, up from pounds 102.7m.

Unilever, the detergents and foods group, will probably suffer a downturn, with the year's figures coming out at pounds 2.35bn against pounds 2.65bn.

Lloyds TSB, traditionally the first of the old style high street banks to report, is on course to offer the year's figures of pounds 3.2bn against pounds 2.5bn. Perhaps it will also accompany its figures with the mega-acquisition the market expects.