UK EQUITIES SEEN DUE FOR DOWNWARD CORRECTION
The chances of U.K. Stocks continuing
recent rises as budget euphoria gives way to the uncertainties
of a probable election are small, and market analysts say there
will probably be a downwards correction in the next few weeks.
    The U.K. Market has managed a dizzy rise since the New
Year, with the FT-SE index of 100 leading shares lifting 22.5
pct since January 2 to current levels around 2050.
    "Over the next month or two the odds are that the index will
drop back to around 1,900," said John Goldschmidt, head of
equities research at Chase Manhattan Securities.
    "A five to 10 pct drop is likely. There was a six pct fall
before the 1983 election when the Conservatives were further
ahead in the polls and the market was on a multiple of only 14
instead of 18 now," noted Nick Knight of brokers James Capel.
    "The old adage is "sell in May and go away'. That's likely to
apply this year but will probably start in April," he added.
    But few analysts believed a correction would spell the end
of the bull run that has now lasted for some six years.
    "As long as corporate profits and earnings keep on growing
then the pressure for continued rises will be there. There
seems little prospect of the growth stopping in 1987/1988," one
said.
    Much of the recent enthusiasm has stemmed from the belief,
already virtually discounted, that the ruling Conservatives
will call an election in the next few months - probably June -
and sweep home to a third term in office.
    Even if this does happen, however, pre-election nerves are
likely to produce the traditional effect of damping down the
market until the result is clear.
    "It's likely there will be one or two hiccups of confidence
about the Tories winning an overall majority," Goldschmidt said.
    "It would be quite out of character for the market to
continue to sail serenely upwards right through the election
and beyond," added brokers Phillips and Drew in a recent report.
    The belief that the government itself is worried about the
impact of the Alliance party disrupting the usual two-corner
fight of Conservative and Labour with unpredictable results, is
not likely to give reassurance, one analyst noted.
    Other factors also indicate that the market is vulnerable
to a downwards correction. U.K. Stocks had ridden up partly on
the back of record rises in New York and Japan and a pause in
either suggests that London would inevitably follow suit.
    There would also be little new encouragement provided by
general economic factors as much of the recent optimistic news,
including this month's half point cut in base rates to 10 pct,
is already built into prices.
    "The economy is looking okay, but it can't support 20 pct
increases every three months indefinitely," one said.
    Also, market liquidity, a powerful driving force behind the
recent rises, shows signs of drying up under the pressure of
the government's privatisation campaign.
    The next few months will see cash calls for second tranche
payments on British Gas Plc <BRGS.L> and British Airways Plc
<BAB.L> as well as the proposed sale of <Rolls Royce Plc> and
the as-yet untimetabled sale of the government's 31.7 pct stake
in British Petroleum Co Plc <BP.L>.
    On top of that, there will be calls from the gilt market
even though last week's budget limited the projected 1987/88
borrowing requirement to four billion stg.
    "We are looking for a squeeze on cash flow, and that's not
including rights issues which have been low so far this year
and may pick up in the second quarter," Knight said.
 Reuter
