Black Beauty: A Recovering Quadruped

Just a question of waiting then! After all it would give a nice Christmas feeling without somebody upping the temperature would it ;-)

23 Dec 2005
CANTOR INDEX
David Buik, Head of PR, Cantor Index

Strong dollar will make UK banks look cheap
FTSE in 2006

Q. We've seen the FTSE dropping from a four year high today, but where do you see the FTSE going over the first few months in 2006?

A. We have to look back to the beginning of 2005 where it was very difficult not to understand the difference between the declining performance of the UK economy and the fact that oil prices and metal prices would dominate the FTSE. So we've seen the FTSE perform, outperform, the level of its own incompetence. Add a little bit to that, of course, the performance of the utilities and to a slightly lesser degree, the drug sector and that's where we've got something like a 15 per cent gain in 2005.
In 2006, there's no reason to suppose that we won't see something like a 500 or 600 point rally to somewhere between 6,000 and 6,100.

I think the driving force in 2006 is going to be mergers and acquisitions. I think it might be folly to look for any more juice out of the oil or mining sectors. I think they've possibly run their race for the time being. Perhaps the banking sector, which has underperformed the market dramatically in conjunction and consequence with banks in the United States with the exception of investment banks, they could well be in the M&A game again. Together with utilities and tobaccos those are the possibly the stocks that we see our clients supporting more going through to 2006 together with, of course, the building sector where we've seen Persimmon join the FTSE 100 in recent days. That may be the first of several deals to come.


M&A prospects

Q. People are quite excited obviously at the prospects of some M&A activity (and we've already seen some big deals coming through the pipeline) particularly if non-UK buyers are tempted to pay a little bit too much for some of the FTSE assets.

A. I think people need to pay great attention to the value of foreign exchange. When the dollar rallied so strongly during the course between the beginning of September and the end of November when something like 20 big figures against sterling, that made the likes of Barclays and perhaps other UK banks look quite cheap for predators such as Citigroup, Banc of America and JP Morgan. But now we've gone back a certain amount – maybe five or six big figures at the moment – it doesn't make them quite so attractive. I think it's all down to do with how strong or weak the dollar will be in 2006, whether the budget deficit in the US, together with higher interest rates, which could possibly hit 5 per cent may well affect activity.