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UK Market Update - October 2009

October 2009

The FTSE 100 Index has rebounded from the six-year depths it plumbed only a matter of months ago. The blue-chip index finally breached the psychologically important 5,000-point barrier in September, reaching its highest level for almost a year, while stock markets in America and Europe have also posted impressive gains.

The FTSE 100 Index has rallied by more than 40% since its March lows and, although it remains considerably below the levels reached before the demise of Lehman Brothers, there is some concern that the market’s rally has surpassed realistic prospects for corporate earnings. According to Bloomberg, the FTSE 100 Index is now at its most expensive level for seven years.

Hopes of a burgeoning economic recovery in the UK and strengthening economic data from France, Germany and the US have provided investors with some much-needed encouragement; meanwhile, signs of reviving demand for commodities from China have boosted shares in mining and natural resources firms. Corporate earnings from many companies have provided positive surprises, although it is worth remembering that some of these gains were achieved by cutting costs and downgrading forecasts rather than through increased demand or higher turnover.

The path ahead is unlikely to be trouble-free, and prospects for the UK stock market and economy remain far from clear. The Organisation for Economic Co-operation and Development recently downgraded its forecast for the UK economy for the third quarter and does not expected the UK to return to growth until early next year. On the other hand, the National Institute for Economic & Social Research believes that the UK economy staged a return to growth during the three months to the end of August.

Looking ahead, if the economic backdrop does continue to improve, this is likely to provide further impetus for corporate earnings. However, if the early signs of economic revival begin to wane, then sentiment is likely to change rapidly from tentatively positive to negative. In particular, unemployment and consumer spending could provide obstacles for recovery; meanwhile, there is the worry that, once the government withdraws its economic stimulus measures, the UK economy will find it hard to maintain the apparent upward trajectory.

On balance, however, the recent share-price rally is encouraging, not least because it demonstrates that investors are willing to dip their toes back into the choppy waters of equity investment. However, keep a watchful eye out for any further bad news as this could undermine that fragile investor sentiment, leading to fresh sell-offs. Only time will tell.

Shirebrook Financial Services Ltd is authorised and regulated by the Financial Services Authority. The contents of this article do not constitute advice. Before taking any decisions, we suggest you seek advice from a professional financial adviser. All figures and data contained within this document were correct at time of writing.

UK Market Update - October 2009

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