VIEW's 2004 Predictions

GLOBAL FORECASTS... Rates Important in 2004

11 December 2003.
Interest Rate Rises to Limit Stock Market Rally in 2004

London - Equity strategists predict world stock markets will pursue their recovery next year, buoyed by strengthening corporate profits, but rallies are likely to be muted by official interest rate rises, according to a Reuters poll.

The poll of around 100 equity strategists in Europe, North America and Asia shows they expect major stock indices to rally on average by about 11 percent between now and the end of 2004. Major U.S. indices were tipped to rally by eight percent and European indices by around 10 percent. The biggest recovery is expected in Japan with predicted gains of 19 percent.

For the UK's FTSE 100 index, strategists gave a mid-range forecast for it to end 2004 at 4,825, 11.3 percent higher than Wednesday's close of 4335.4 and up from the previous poll's forecast of 4,600.

Overall, the poll shows strategists expect the return of corporate profitability, notably in the United States, to encourage investors to put more money back into stocks. "As I look to next year, I would not recommend investors jump ship," said Ned Riley, chief investment strategist at State Street Global Advisors in Boston. "I think the assets far outweigh the liabilities for a better market."

However this optimism is tempered by the knowledge that official interest rates, held at 45-year lows in the United States to nurture economic recovery, will have to go up eventually, probably in mid- to late-2004.

"Next year will see a tug of war between earnings, which should rise and be the main market driver, and interest rates, which should also rise and thus cap equity performances," said Francois Lemoine at BNP Paribas in Paris.

After three years when analysts proved overly bullish on every index covered by the poll, this year some of them look set to get it roughly right.

The U.S., German and Hong Kong indices are all now just above the levels that last December's Reuters poll predicted for end-2003, while the Toronto index has performed 10 percent better than was forecast. The Taiwan and Australian indices are only a little below the forecast levels.

However, last December's forecasts for the British, French and Japanese indices still look ambitious, at between five and eight percent above current levels.

For next year, market worries include violence in Iraq and uncertainty about whether George W. Bush will win a second term in office in U.S. presidential elections in November. But strategists say stocks should be underpinned by profit growth.

In Europe and Japan, one major concern is the dollar's plunge, making exports priced in yen and euros more expensive. But companies offering services or selling consumer and luxury goods are well placed to cash in on increased consumer spending and cheaper imports, analysts say.

Many of the strategists polled remain cautious about the 2004 outlook. In countries such as Britain and Australia, where homeowners have kept economies buoyant through cheap borrowing against booming house prices, higher interest rates could have a major impact.

"We have lived off an unsustainable consumer boom and have put enormous stress on household balance sheets," said ABN Amro's Gerard Minack in Sydney.

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