Time to take stock of the market

After scaling the heights, shares are in for a period of uncertainty. Here and on page 26 we look at the best way forward for investors

The stock market seems to have entered its pre-election limbo. Although the FT-SE 100 index of leading companies is once again trading close to the all-time high that it reached earlier this year, shares are showing little inclination to rise.

Investors may have to get used to this over the next 18 months. While most of the City believes it can trust Tony Blair and New Labour, the market is set for a period of inevitable uncertainty. Chief niggles are about Labour's policies on a minimum wage, corporate taxation and employment legislation.

John Hatherly, head of research at M&G, Britain's biggest unit trust company, believes the City's election worries are largely restricted to the likes of the electricity and water companies, which Labour has threatened with a windfall tax. More telling, he believes, is the weakness of the UK manufacturing sector. "The difference in economic policy between the two main parties has narrowed so much that there are no major fears about Labour," Mr Hatherly says.

Some analysts even believe that a Labour victory could be good for the financial markets, particularly gilts (government bonds) and the strength of sterling. Stewart Cowley, head of global fixed-interest at Hill Samuel Asset Management, says the markets do not trust the UK's stance on European monetary union, and accordingly charge the Government a "risk premium" on its borrowings. A Labour government that could maintain headline unity over Europe would benefit from lower interest rates, cutting the cost of financing the national debt by perhaps pounds 200m a year. This could lead to a rise in the value of the pound that would help keep inflation under control by encouraging exporters to cut costs. Not everyone is so sanguine.

Michael Hart, the veteran manager of the pounds 1.7bn Foreign & Colonial investment trust, said: "These Labour politicians are by nature interferers and slightly anti-business. One sees that in the papers every day with comments about the profits made on privatisations. There will be a lot of that. When something crops up there will be an inquiry or a reference to the Monopolies and Mergers Commission which will unsettle business a little bit."

Simon Davies, the chief investment officer at Threadneedle Asset Management, which manages money for the Allied Dunbar and Eagle Star insurance companies, is also concerned about Labour taking a tougher line on takeover bids. MMC investigations often take six months or more. More referrals could help choke off the takeover activity that helps drive share prices up.

Even more important than the approaching general election is the continued strength of the American stock market. The old adage has it that when Wall Street sneezes, the rest of the world catches a cold.

This was amply demonstrated last month when fears about the US economy overheating and bad results from some leading technology companies prompted the Dow Jones industrial average, a leading US stock market index, to plummet 166 points in a day. Although largely unaffected by the underlying problems, European markets were immediately caught up in the backwash, with the FT-SE 100 index briefly falling to its lowest level this year.

Both the US and UK markets have since staged a healthy recovery but many British fund managers remain wary of US share prices, which have risen remarkably in the past two years.

Mr Hatherly said: "We are fairly cautious on the US market but I don't see a large setback. It does not look as if it is going to collapse but it's had a very good run and is looking a bit tired."

Most fund managers expect no more than modest progress from the UK stock market over the next year or so. According to Legal & General Investment Management, another big investor, City forecasts of where the FT-SE 100 index will be in a year's time range from 3,400 to 4,100. The average is 3,820, only 10 points higher than the index began this week.