View from City Road: Unnerving markets

Almost six years to the day since the stock market crash, no one likes to talk about walls of money; instead it is 'international capital flows' that are pushing the market to new heights. Semantic delicacy aside, however, some aspects of the market's behaviour this week bear an unnerving resemblance to that of 1987.

Yesterday's 34.5-point rise in the FT-SE 100 was partly driven by the euphoria in Hong Kong, which spilled over into companies like Hongkong and Shanghai Banking Corporation and Cable and Wireless, while British Telecommunications is benefiting from excitement over the US tie-up between Bell Atlantic and Tele-Communications Inc. But the UK market is still pulling in funds from international investors, led by the Americans, with private investors - as in 1987 - piling in on their coat tails.

Yet, even before yesterday's peak, shares were standing close to their highest price-earnings multiple, and lowest dividend yield, for more than 20 years. That is despite economic signals that can best be described as mixed, with manufacturing output indicating that industry is still struggling against recession, while the fall in unemployment and rise in inflation make large interest-rate cuts something of a gamble.

The market has proved similarly impervious to gloomy statements from companies as diverse as Tesco and Guinness, Williams Holdings and P&O. Part of the justification for the surge in share prices in August was that the September results season would prove that analysts' growth forecasts, already demanding, were too pessimistic. Instead, downgradings have been as common as upgradings. Indeed, some brokers have revised their 1994 expectations downwards as they fear that volume and margin recovery will not be strong enough to compensate for the exchange and interest- rate benefits in the current year.

Despite the lack of positive news, however, few are predicting a sharp correction in share prices, at least in the short term. While UK economic growth may remain sluggish and the European recession will hit our growing band of international companies, equities still look a better bet than the alternatives. Interest rates are at historic lows and the consensus is still that the next movement will be down, rather than up. Bond prices have continued to rise, and may yet have some life in them as short rates fall again. But the lack of alternatives is not the most reassuring basis for buying shares.