CITY experts are preparing for a rally of up to 15% in the FTSE 100 before the end of the year as signals suggest the credit crisis has created the best buying opportunity for UK shares since the 2003 “Baghdad bounce”.

It is nearly five years since the index of Britain’s leading shares reached rock-bottom as troops prepared to invade Iraq, following the savage bear market sparked by the dotcom bust. The index hit 3,287 on March 12, 2003, sparking a rally that saw it jump 29% in the following six months and soar 105% before the credit crunch derailed the markets in June last year.

A growing number of commentators argue there are parallels which indicate the FTSE 100 is poised for a similar bounce in the second half of this year, with big implications for investors with money to spare for this year’s Isa allowance.

Many ordinary investors have been nervous about committing money to the markets with the index down 15% since the start of the year. It fell 137 points last week on fears that another big US bank could follow Bear Stearns to the brink of collapse. Some global markets have suffered even more – China, a favourite among investors – is down 28%.

However, if the professionals are right, investors should be investing their cash while they still can: the deadline to invest is just two weeks away on April 5.

The bulls point to signals which suggest shares are the best value since the 2003 market low. Last week the dividend yield on the FTSE 100 jumped to 4.14% as prices crashed, while the yield on five-year government bonds, or gilts, dipped to 3.97%.

The only other times the dividend yield has exceeded the five-year gilt yield in the past 50 years was in March 2003 and February 1958, when the market doubled in the following 12 months.

Graham Secker at investment bank Morgan Stanley said: “The 10-year gilt yield [4.3%] hasn’t slumped below the dividend yield yet, as it did in 2003, so the buy signal isn’t quite as powerful, but it’s getting there.”

Another measure of share-price value is the price/earnings ratio, with markets looking even cheaper than five years ago. The FTSE 100 is trading on a p/e of 11 times, compared with 26 before the dotcom crash. In 2003 the p/e of the market was about 14 compared with a long-term average of 15.

Analysts also pay close attention to the amount of cash in fund managers’ portfolios when trying to pinpoint the bottom of the market. This is also sending off an even stronger signal than 2003: fund managers are keener on cash than at any time since the 1998 LTCM hedge-fund crisis which preceded the dotcom boom.

Last month, fund managers had 4.9% of their portfolios in cash, compared with 4.7% the previous month, according to Merrill Lynch, another investment bank. A rise in cash balances can signal a rally, as it means there is money on the sidelines ready to be invested as sentiment turns.

A survey of Footsie forecasts by The Sunday Times last December revealed experts expected the market to end this year at around 6,500. Several have now cut their forecasts. UBS has dropped its end-of-year prediction from 7,200 to 6,500 and Legal & General has gone from 6,500 to 6,000. However, our panel still expects the market to reach 6,325 by the year-end.

That would be below the Footsie’s level of 6,477 at the start of the year, making this the worst 12 months for investors since the bear market of 2002. However, it is a 15% jump from where we are now – so there are opportunities as the end of the Isa season nears.

Few are willing to bet there won’t be more turmoil in the next few months. By March 2003 global shares had been in a bear market for three years, so many of the problems that had hit shares had worked themselves out. Today’s credit crunch is only nine months old so there could be more bad news to come.

Karen Olney at Merrill Lynch said: “Markets are likely to suffer until investors are convinced the credit crisis won’t bring something uglier than a 1990s-like recession.”

However, many commentators think the market will only fall a few hundred points more at most. It is already down 1,237 points since the credit crisis struck in June. While the markets are still on edge, most advisers recommend investors take a safety-first approach when investing their Isa.

Michelle McKenzie, 23, from Knightsbridge, London, a freelance marketing consultant, doesn’t want to miss out on a market bounce but is still nervous so has invested her £7,000 Isa allowance in a range of lower-risk funds recommended by adviser Best-invest. These include Blackrock UK Absolute Alpha and F&C Blue funds. Blackrock’s fund is up 13% over the past year and F&C’s is up 3%, against a 12% fall in the FTSE 100.

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