Why the Footsie is still cheap

Article Abstract:

British stocks may appear to be expensive after the Footsie's rally, if gilt yields are used as a benchmark, but the inflated price of a few stocks is affecting averages for the FTSE 350. Equity valuations may also be high due to low risk premiums since inflation is low and economic growth has become stable. Productivity and economic growth are expected to rise. Low valuations reflect uncertainty, which could be related to a number of factors such as a drop in US stock prices, a drop in pricing power over the long term, or disruption related to the millennium.

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Still attractive

Article Abstract:

UK equities are still attractive to investors, according to HSBC James Capel. Market valuations are good compared with other European countries, and ratios of yields for government securities (gilts) compared with stock yields have fallen. This is partly due to low gilt yields which could drop further. There are still risks from increases in UK interest rates, and earnings growth is disappointing despite a boom in the economy. Disappointing earnings are linked to low productivity as well as the high value of pound sterling.

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Why Footsie may still be cheap

Article Abstract:

United Kingdom stock prices measured by the FTSE 100 index may not be overvalued, despite low dividend yields. Demand for equities is strong, especially from institutional investors, and cash takeovers and stock buybacks are likely to outweigh new issues in 1998 by some 30 billion pounds sterling. UK equities are cheap in relation to stocks in mainland Europe, and return on capital is high. Recession could occur, but debt is less important for the companies and consumers in 1998 compared to the height of the previous boom.

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