Good performance from UK equities

EQUITY MARKETS

The UK equity market performed well during January with the strongest month-on-month returns since August of last year. At a sectoral level, the best performers have been building & construction, oil and retail banks. Smaller company stocks have also shown signs of recovery following their underperformance during the second half of last year.

CAPITAL ISSUES
The biggest capital issue during January 1997 was raised by property company Great Portland Estates. It will enable the board to fulfil its strategy of expansion and to refocus the company’s portfolio, particularly in the retail sector.

SMALL COMPANIES
At the beginning of February the FTSE SmallCap Index hit a new closing high and we believe that the outlook for the remainder of the year is very good. Unlike 1996, growth should not be confined to the first half of the year; sterling strength is providing a boost to those companies geared towards the domestic economy and we believe that this environment will remain throughout 1997.

OVERALL SUMMARY
The extraordinary gains made in the US stockmarket during 1995 and 1996 are unlikely to be repeated this year. There continues to be a risk of higher interest rates and we expect bond yields will rise, putting further pressure on equity valuations. Japan is now in a phase of fiscal tightening making it more difficult for the consumer to bring about an economic recovery. However, valuations against bonds look attractive and we remain optimistic that the Japanese equity market will achieve satisfactory growth during 1997.

INFLATION
As in the late 1980s, almost all inflationary indicators (house prices, consumer confidence and rising labour costs) point to a sustained rise in UK inflation during 1998. There is little reason to expect consumer activity to slow, given the positive outlook for wages, a buoyant housing market and extra disposable income in the form of windfall payments from building societies.

INTEREST RATES
Money supply rose during December by more than expected, thereby increasing pressure for a rise in UK interest rates. The Chancellor will continue to resist moves to increase interest rates in the face of economic strength and given that political factors must now be considered. We anticipate a 0.75% to 1% rise in interest rates shortly after the election, regardless of the outcome.

EXCHANGE RATES
The US dollar has started the year strongly and the market remains unconvinced that economic recovery outside of the dollar bloc is strong enough to reverse this current trend. Sterling gave up ground against the US dollar but remained stable against both deutschmark and yen.

Information supplied by Scottish Amicable Investment Managers: 0141 303 0000.