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UK Focus - 9th May 2009

The FTSE ended the week higher, tracking US equity gains. The recent better than expected UK banking sector updates also supported sentiment. The headline UK index has now progressed around 13% in the 5 weeks to-date during Q2. Inevitably some sectors continue to fair better then others. Resource and financial stocks continue to out-perform house builders, property and industrial related equities. This trend, many commentators suggest, is likely to continue with key analysts, Goldman Sachs and Morgan Stanley, downgrading leading property companies or advising clients to sell, whilst house builders remain vulnerable on the expectation that the sector will need further injections of capital to strengthen beaten-up balance sheets. News that house prices declined 1.7% in April (Halifax data) also encouraged equity investors to allocate cash elsewhere on the presumption that the UK property market may be the last sector to enjoy a recovery. On a more upbeat note regarding the affordability of homes, the sharp decline in prices over the past year, (17.7% lower) has improved the house prices to earnings ratio, which is now at a 6 year low of 4.26 according to Halifax. Lower interest rates have certainly helped but with rising unemployment and mortgage availability still not back to normal (pre-Lehman) levels the picture for the rest of 2009 is mixed at best.

Other UK specific news included a hold on interest rates. The Bank of England Monetary Policy Committee opted for no-change to the current rate of 0.5% but did announce an expansion of the £75 billion quantitative easing program adding a further £50bn to help the UK recover from the “deep recession”. The BoE also indicated that it did not consider inflation to be a threat hinting borrowers can expect to enjoy low interest rates for some time yet, certainly into 2010, based on current data.
Look forward, the FTSE is likely to track the S&P 500 pretty closely so the wealth of diversified UK equity investors remains at the mercy of US market sentiment. However, only the most pessimistic market analysts suggest the current rally is a false dawn, and predict a return to new fresh lows. The consensus forecast predicts flat performance or further gains through Q2, with inevitable bouts of short-term profiting taking when markets progress too-far, too quickly.