Fund managers turn more bullish on shares

As the City of London baked in the sun yesterday, the stock market was holding on to the heat generated by the post-Iraq war surge, which has seen the FTSE 100 index rise from its mid-March low of 3,287 to yesterday's 4,102.

With Alan Greenspan giving an upbeat testimony before Congress in the United States, the continuing strength provided the perfect backdrop for a surprisingly bullish monthly survey of fund managers from Merrill Lynch. Last month the survey had been cautious, predicting a "summer lull" after the so-called Baghdad bounce.

But the July survey showed several key changes which had David Bowers, the bank's chief global strategist saying that people were starting to get "all bulled up".

Why the change? The first reason is the perceived end to the cycle of interest rate cuts which started in January 2001. The sharp rise in bond yields over the past month appears to have cemented the view that global interest rates may no longer be falling. This month's survey also showed the largest wholesale shift from bonds into equities since the second quarter of 2002. Of the 293 fund managers polled, more than half now think rates will be higher a year from now.

Secondly, forecasts for the economic outlook are more positive with nominal forecast for G7 GDP growth now running at 3.5 per cent compared with 3.0-3.1 per cent a few months back.

This has filtered through to a more positive view on company profits with fund managers expecting earnings per share growth of around 9 per cent in the next 12 months, up from 6.5 per cent three months ago.

Encouragingly these earnings are expected to be of a higher quality too, driven less by cost-cutting and more by higher volumes. The downside here is that there is still no pricing power.

Finally, fund managers seem to be shifting in their demands for use of company cash. Crucially, there is less pressure to rebuild balance sheets and a greater willingness to see higher capital expenditure. A quarter of fund managers expect capital expenditure to rise against just 10 per cent three months ago.

These changes have already had an impact on sector preferences with fund managers selling utilities and consumer staples to make room for technology and cyclical stocks such as media companies.

One of the negatives for the UK market is that it has been viewed as relatively defensive and so the geographic swings are likely to be towards other opportunities.

These could include Japan where foreign money has been pouring into the Japanese stock market even if domestic investors continue to be reticent.

Another recovery play appears to be Germany with Spain the biggest improver on last month.

In the UK it is striking to note that while money has flowed out of utilities, it has not been heading for tech companies but banks and insurance instead. That shows a degree of nervousness about the cyclical swing.

What are the negatives? A big one is the lack of corporate pricing power and until that returns it is hard to see equities staging a full revival.

The other is the limited room for disappointment. After the recent gains, stocks will succumb to rapid profit taking in the event of bad news. Cash levels are still low and fund managers are having trouble finding value. Funds have already started to shift from bonds to equities and historically this has meant that the easy money in shares has already been made.

Club of Tigers gets ready to roar

Country bumpkins in search of a night on the prowl at Tiger Tiger, the chain of nightclubs run by Urbium, had better think about moving house. The fancy sounding Latin name, chosen by the group when it was spun off from Noddy-owning Chorion last year, means "of cities", which is exactly where its sites are based.

This urban bias may help to explain why the group's share price has sunk faster than a pint being downed by a student on a night out. Trading mishaps at rivals such as SFI and Luminar have made the stock market wary of city centre-focused bar groups. As Steven Palmer, Urbium's finance director, confessed yesterday: "It was easier to sell a package holiday to Baghdad than our shares last year."

But Urbium has proved its doubters wrong and the shares have enjoyed quite a bounce from their 212p low in December. It has shown that having 16 sites (out of 26 in total) in London's West End need not be a disadvantage.

A trading update ahead of its interim results revealed that underlying sales in the second quarter both in London and across its eight Tiger Tigers were positive. This was after a fall in the first quarter, when the closure of the Central Line made it hard for City workers to head west for a night of debauchery at Sugar Reef, Red Cube or Zoo Bar. It said total sales for the six months to 29 June were up 25 per cent at ?31.2m.

The shares, up 16 per cent at 388p, trade on an unwarranted discount to the likes of Yates and Regent Inns. Buy.