Positive economic momentum to boost FTSE to record high

By Atul Prakash

LONDON (Reuters) – Britain’s top share index will end the year at a record high as an improving domestic economic outlook and growing optimism about company earnings boosts investors’ appetite for risky assets, a Reuters poll found.

The poll, conducted over the past week, showed the blue-chip FTSE 100 index will climb to a new life-time high of 7,065 points by the end of 2014, over 7 percent higher than Wednesday’s close of 6,573 points.

The median in the survey of 38 fund managers, analysts and traders is higher than the benchmark index’s current record of 6,950.60 set in December 1999 but is lower than forecast in a December poll. By the middle of 2014, the FTSE 100 index is forecast to reach 6,820 points.

Following a drop of about 5 percent in the last two weeks on tensions in Ukraine and concerns about slower growth in China, the world’s second-biggest economy, the FTSE is now down 2.6 percent for the year, against a 14 percent bounce in 2013.

However, analysts were again bullish on the market’s longer-term outlook on optimism about Britain’s economic recovery and improving company fundamentals.

“We expect double-digit earnings growth, helped by an improving domestic economic backdrop, to provide the fuel for the equity rally to continue,” Robert Parkes, equity strategist at HSBC Securities, said. “We have ‘overweight’ recommendations on banks, materials, energy and telecoms.”

Official data earlier this month showed manufacturing strengthened in February and mortgage approvals hit their highest level in January since November 2007, underlining the momentum behind the country’s economic recovery.

A Reuters poll last week said the UK economy will grow faster than any other Group of Seven major industrialised country in coming quarters. If forecasts for a rise of 0.6 percent per quarter through to September 2015 are met, the economy will be back to its pre-crisis size by June.

“Although valuations are very high, as of the moment, there seems to be little standing in the way of the momentum trade,” Gerard Lane, strategist at Shore Capital, said. “The UK economy being so strong and resilient would leave me to continue to favour housebuilders despite them being very strong this year.”

The Thomson Reuters UK Homebuilding index has outperformed the broader market by rising 7 percent so far this year after climbing 59 percent in the previous year and 64 percent in 2012, partly supported by favourable government schemes such as the “Help to Buy” programme.

Thomson Reuters Datastream shows the FTSE 100 has become relatively expensive, with its 12-month forward price-to-earnings ratio at 12.8, against a 10-year average of 11.8 times.

However, the market is likely to continue having a bumpy ride on the way up, with issues such as the proposed move by the west to impose sanctions against Russia following its actions in the Crimea region and signs of a slowdown in China’s growth spooking sentiment, analysts said.

Some analysts remained cautious on the market’s outlook after recent sell-off to one-month lows.

“A lot of forecasters have suggested that we could well see further gains in equity markets in 2014. This seems somewhat optimistic against a backdrop of slowing emerging market growth and a slowdown in the Chinese economy,” said Michael Hewson, analyst at CMC Markets.

“The time is well overdue for a reassessment of risk.”

(Polling by Atul Prakash in London, Alexandre Boksenbaum-Granier and Blaise Robinson in Paris; additional polling by Hari Kishan and Swati Chaturvedi in Bangalore; Editing by Toby Chopra)