MONEY TALK By Sue Whitbread Independent financial adviser, Chartwell Asset Management

At first glance, stock market prospects look encouraging.

Interest rates are at their lowest level for more than 40 years, inflation is under control and not expected to increase in the short term.

Over the summer months, UK company results have exceeded expectations.

As a result, the UK FTSE 100 index of shares has finally managed to break through the key 4,000 level and more importantly, hang on to it.

According to data analyst Financial Express, investor confidence is at a 26-month high.

Pension funds and insurance companies have been offloading shares in favour of bonds at double quick speed in order to remain solvent

Private investors - so battered and bruised during the last three years - are at last coming back to the stock market.

Hopefully, this time though investors will be focusing on the long term rather than making decisions based on achieving short-term profits.

Rocky road

Since the millennium, global stock markets have been hit by one crisis after another.

From the bursting of the technology bubble to Enron, it has been a rocky road for most private investors.

What is more, pension funds and insurance companies have been offloading shares in favour of bonds at double quick speed in order to remain solvent.

Many would argue that they've done this approximately three years too late, but it just goes to show that the institutions have been just as surprised by the extent of market falls as have private investors.

But is the current recovery sustainable?

In truth, it is hard to see where the demand for equities will come from

Put simply, the success of global stock markets is determined by the health of the US economy.

However, Stateside the signs are mixed.

Not yet a bargain

Recent economic and corporate statistics have been largely favourable and the monetary authorities are quite prepared to run with expansionist policies to stimulate the economy.

But even at its current levels the US stock market is not cheap.

There are probably very good stock-picking opportunities, but overall there is little to suggest that the market is trading at a bargain level.

The UK stock market represents better value than the US, dividends look healthy particularly when compared to the rate of inflation.

However, the money markets in the UK are pricing in an interest-rate rise over the next 12 to 18 months, and if they are right, then things could feel very different here.

What is more, with tough new accounting standards set to come into force at the back end of 2004, most pension funds are unlikely to increase their exposure to equities.

In truth, it is hard to see where the demand for equities will come from.

Muted impact

Without this, despite good fundamentals, the impact upon the market will be muted.

Perhaps the best chance is from increasing merger and acquisition activity, which is already underway to a notable extent in the UK.

Long-term shares should outperform other investments such as bonds.

However, remember those that try to second guess the stock market are unlikely to be successful.

There is little substitute for having a properly diversified portfolio when it comes to successful long-term financial planning.

Whether the markets rally or fall from here, sensible investors will be planning their portfolios on a long-term basis over which time such ups and downs really do become rather insignificant.

The views expressed are solely those of Ms Whitbread and are for general information only, do not constitute financial advice as defined by the Financial Services Act and are not intended to be relied on for the purposes of making an investment decision.