Investment experts raised their year-end forecasts for the stock market last week, after British blue-chips posted their best monthly performance since the start of the last bull run in April 2003.

The FTSE 100 soared to a near seven-month high of 4,608, taking it up 31.2% since its six-year low in March, as the City cheered better-than-expected results from BT and Centrica, owner of British Gas.

While good news for shareholders, consumer groups said households were being ripped off. British Gas’s residential arm posted an 80% profit jump, largely because it has cut energy tariffs by 9% while wholesale prices are down 55% from their peak, said comparison site theenergyshop.com.

BT, which is raising landline charges from October, posted a smaller-than-expected 3% dip in first-quarter earnings, and said operating profits from its retail division jumped 30% to £359m. Barclays is expected to continue the bonanza tomorrow, with analysts predicting a 31% rise in first-half profits to £3.6 billion.

Ted Scott at F&C, the fund manager, said strong financial results supported his view that the economy was over its worst. He believes the recovery has not yet been fully priced into shares, and upped his FTSE 100 year-end prediction to 5,000 from the 3,900 he had pencilled in at the start of the year, when the market stood at 4,434. “If this is the first leg of a bull market, as I believe, it will continue for some time,” he said.

Graham Secker at Morgan Stanley — among the most bearish of a panel of Sunday Times analysts at the start of 2009 — upped his year-end forecast to 4,800 from 4,300, while Fidelity said there was a “very good chance” of the index reaching 5,100. If so, it would have made up half of the losses sustained during the bear market.

The FTSE 100 lost 47.8% from its peak in October 2007 to its trough in March, but is up 3.9% so far this year, despite gloomy economic data. “Economic numbers report the past, companies observe the present, while the market lives in the future,” said Fidelity director Jeff Hochman.

The upbeat mood came as Nationwide said there was now a “reasonable chance” that house prices could end the year higher than where they started.

However, Savills, the estate agent, has revised down its house-price forecast for 2010, from a rise of 1% to a 3.1% fall, citing fears that rising prices will not last.

Others felt the equity market rally will also run out of steam. Redmayne Bentley, a broker, expects the index to end the year lower at 4,400. “The FTSE has tried to break above 4,600 three times since November, but it’s unsustainable,” said the firm’s Morven Whyte. We ask the experts what investors should be buying.

FINANCIALS

Abbey, owned by Spanish group Santander, also defied the gloom last week, reporting profits up 30% on the back of better mortgage margins. That stoked rosy expectations for British banks, many of which report this week.

HSBC is poised to unveil profits of £2.5 billion tomorrow, while analysts are pencilling in losses for Lloyds Banking Group and Royal Bank of Scotland on Wednesday and Friday — with a consensus of £6.1 billion and £363m. Others are more optimistic, with Credit Suisse expecting RBS to turn a £1.5 billion profit in spite of £8 billion of bad debts.

Sanjeev Shah, who took over Fidelity Special Situations from Anthony Bolton in 2008, likes banks and other financials, and has stakes in “restructuring play” RBS as well as the London Stock Exchange. “Financials fit very much with my contrarian value-based style,” he said.

The Share Centre prefers insurers. It likes Royal & Sun Alliance, which releases results on Friday.

DEFENSIVES

In bull markets, cyclical sectors (financials, technology, construction) tend to rally, while defensives (pharmaceutical and tobacco companies) struggle. F&C’s Scott likes “good quality defensives” whose share prices have lagged the market. The telecoms and pharmaceuticals sectors “generally look very cheap”, he said, tipping Vodafone, Glaxo Smith Kline and Astra Zeneca.

GROWTH STORIES

If the recovery is sustained, investors will start to focus on growth stocks again. Tom Ewing, manager of Fidelity UK Growth, said investors should buy consumer goods firm Reckitt Benckiser, natural gas company BG and oil explorer Tullow Oil. These are “long-term quality growth stories” at “a good price versus their history”, he said.

OVERSEAS

Legg Mason’s value investing legend Bill Miller, who had beaten the market for 14 consecutive years before stumbling last year, said “bargains abound” in the US stock market. He particularly likes the technology and financials sectors, tipping Texas Instruments, IBM and insurer Alfac.

Times Recommends

• How to sell your home in a downturn
• How to boost your spending power
• Unemployment benefits explained