On current policy the medium-term outlook for equities is good. Recovery in the economy is being led by increased activity in the service sector, while stronger growth in continental Europe will support higher industrial output starting in late-1996 or 1997. However, most commentators now expect a rate rise, or rises, soon after the election, whichever party wins.
Earlier in 1996 there was rising interest in equity finance. But share price falls in July and August have had an adverse effect on new issues.
For example, the Somerfield flotation was originally priced at 190p a share, but this was reduced to 145p, lowering the company’s valuation from # 570m to # 435m.
Increased income from dividends and share buy-backs, as well as higher premium inflows, have pushed up institutional liquidity over the last two years. Stronger asset prices in other parts of the economy (eg agricultural land and the London art market) are indicative of a spillover into other sectors. Such trends were identifiable in the boom-bust cycle of the late-80s.
Share prices in London and New York have made up a lot of the ground lost in early July. The fast-approaching deadline for a general election (May 1997) suggests that a rate rise will be avoided if at all possible.
Ordinarily lower interest rates would be good news for equities, but if market participants feel that Ken Clarke is playing fast and loose with the economy share prices could suffer in the fallout.
MACRO ECONOMICS – DATA
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Higher house prices kept the fall in the retail price index to a smaller than expected 0.4% in July. Over the short term the outlook is for further falls in the headline inflation rate. Above-trend growth later in 1996 or early 1997 could substantially reduce the spare capacity currently in the economy, leading to a subsequent increase in supply bottlenecks (ie greater price pressures).