Robert Tyerman reflects on the impact of governmental policy.

Shadow chancellor George Osborne may deplore the inflationary implications of the policy of ‘quantitative easing’ – otherwise known as printing money – that the government and the Bank of England have used to combat the recession. But the stock market has been enjoying it.

The FTSE 100 Share Index recently broke through the 5,200 level with some fair momentum behind it, showing a more than 50 per cent rise on its 12-month low. It remains 25 per cent below its all-time peak, reached fully ten years ago, and certainly has scope to gain plenty more ground before the party stops – as it will.

Wall Street has been similarly buoyant, with the Dow Jones Industrial Average breaking through 10,000 for the first time in a year, helped by strong profits growth at banking group JPMorgan Chase, and the US mood has, of course, helped sentiment in London. Moreover, Anthony Bolton, the uncannily successful fund manager who called the market bottom last year, has added his influential voice to the bullish chorus.

He speaks of a ‘multi-year’ bull run, as rock-bottom interest rates force investors into buying shares, and says he is optimistic ‘for the next couple of years. Anything that can show growth in this low-growth environment is going to be bid up by investors.’

Rising sentiment
Markets are already taking cheer from signs of gathering economic recovery and hopes that planned state asset sales will provide some one-off relief for the public finances, especially if better timed than then-chancellor Gordon Brown’s bottom-of-the-market gold sales. Recorded UK unemployment rose by 20,800 in September, its lowest increase for 18 months, though at 5 per cent, the official jobless rate remains at a level that would have toppled governments years ago.

Philip Shaw, economist at the Investec finance group, is not alone in seeing this trend as an encouraging pointer for a sustainable recovery. Meanwhile, the British Retail Consortium has reported impressive overall sales growth in the shops for September, up nearly 5 per cent on a year previously and the strongest monthly gain since April.

In the pivotal property sector, a survey by the Royal Institution of Chartered Surveyors suggests that UK house prices are rising at their fastest pace since the credit crunch began to bite more than two years ago.

Sceptics are right to point out that monetary and fiscal stimuli are so far having a greater impact on the more ‘frothy’ parts of the economy, such as property, retail spending and financial speculation, than on capital investment. Industrial output showed a disappointing 2.5 per cent fall in August and analysts warn that consumer confidence is volatile and could weaken again.

While bonuses for bankers and finance market traders are once again reaching headline-grabbing and indignation-arousing levels on both sides of the Atlantic, the ingredients for yet another bubble with little fundamental economic advance to sustain it are clearly there.

This, in turn, carries the risk that Osborne-type austerity measures could become unavoidable sooner or later, whichever party occupies No. 10 Downing Street, and that, in consequence, Britain risks suffering a ‘lost decade’, as Japan did. Policymakers are acutely aware of this, but ensuring it does not happen is easier said than done.

For now, however, the stock market is not too worried, and a wise course is to look for value and special situations. Banks may not yet be passing on low interest rates anything like fully to commercial borrowers, but a low-rate environment and easy monetary conditions always tend to stimulate equities for a while.

Up and down
In a retail sector showing buoyancy after a tough period, WH Smith has pleased the market with pre-tax profits up 8 per cent to £82 million and a £35 million share buyback programme. At 513p, 8p off their 12-month high, its shares are £2 up from their year’s low.

Mothercare has made less of an impression, with second-quarter sales 7 per cent ahead, though its shares, at 598p, are nearer their 641.5p high than their 259p low. Drinks group Diageo, firm at 977p, has shrugged off a first-quarter sales drop caused by distributor destocking in the USA.

One company at the frothy end of the economy, online gambling group PartyGaming is up threefold at 285p after cheering followers with an 11 per cent third-quarter revenue increase to £69 million and a ‘strong start’ to the last three months. Despite a setback in poker being under pressure from US competition, the company says it is winning new players and is confident about prospects for the full year.

Among the banks, credit crunch casualty Royal Bank of Scotland has excited the sector with plans to sell its 300-plus branches in England and Wales. At 48p, its shares are nearly five times their lowest point, but still well below their 84.5p 12-month high. Lloyds Banking Group is three times its low at 93p, though a long way off previous peaks as it prepares a £15 billion financing, comprising a rights issue and a debt-into-equity swap.

Cairn Energy, the oil group with a major discovery in India, has raised £196 million in a deal with Petronas of Malaysia to fund exploration in Greenland and remains deservedly popular at £30.

Mining giant Anglo American has slid somewhat from its recent price of £22.49 after would-be bidder Xstrata withdrew its merger offer.

Robert Tyerman is news editor of Growth Company Investor, the UK’s leading magazine for AIM and small-cap analysis