Footsie off to flying start as shares return to favour

INSTITUTIONAL investors returning to equities after a decade of favouring other asset classes drove a new year bull rally yesterday that saw the FTSE 100 soar to levels not seen for 31 months.

Analysts expect yesterday's storming start to 2011 trading to continue over the next 12 months, with the City's most optimistic forecasters predicting the index could approach an all-time high of 7,000 by the end of the year.

The FTSE surged back above 6,000, closing at 6,013.87, up 1.9 per cent or 113.93 points, after being ahead almost 150 points earlier in the day.

BP spearheaded the rally, which saw the index hit its highest closing price since June 2008, and banking stocks, including Royal Bank of Scotland, also made a strong start to 2011 after an "extremely weak" period between Christmas and the new year.

Henry Dixon of Matterley Asset Management, part of the Charles Stanley Group, said the City was witnessing a "serious" shift towards equities that would continue to drive the FTSE upwards this year. Investors are attracted by a revival in merger and acquisition activity and a recovery in corporate earnings.

"We are definitely starting to see an asset allocation shift of serious proportions (towards equities]," Dixon said. "On an institutional level this is coming after a decade of net selling. This (rally] has probably been ten to 12 years in the making."

Although the FTSE's progress was tempered towards the end of the day by a more subdued start to trading on Wall Street, the rally stoked hopes that bullish forecasters including Keith Skeoch, chief executive of Standard Life Investments, could be proved right with their predictions that the index will near 7,000 this year. In August, Skeoch correctly predicted that the FTSE would break the 6,000 mark in 2010. He believes it is likely to end 2011 at 6,900, just below the record 6,950 achieved during trading on 30 December 1999 before the dot-com crash.

Graham Secker of Morgan Stanley believes that, provided interest rates remain low and the economy performs strongly this year, the FTSE could hit 7,000.

BP accounted for 20 of yesterday's 113-point gain following rumours that rival Royal Dutch Shell had considered a takeover approach of the oil giant in the wake of the Gulf of Mexico oil spill disaster.

Investors were also encouraged by reports that BP may not need all of its $20 billion (12.8bn) compensation fund, which was set up to repay victims of the disaster. BP shares hit their highest level in sixth months during yesterday's session, closing at 492.9p, up 5.9 per cent.

The banks also added to the FTSE's surge, with Barclays and Royal Bank of Scotland featuring among the day's biggest risers.

RBS jumped 4.1 per cent to 40.68p while Lloyds Banking Group closed up 3.26 per cent at 67.84p. Dixon said UK banking stocks now looked "extremely cheap in a global context".A number of firms go ex-dividend today which is expected to shave a few points off the FTSE.