Stimulus could lift FTSE index

Ashraf Laidi
THE FTSE 100 is the only G5-nation equity index (ex-Japan) yet to hit a new high for the year. The index is up a mere 5 per cent this year, compared to 24 per cent for the Dax 30 and 15 per cent for the S&P 500. But we deem the FTSE’s underperformance to be a signal of further upside ahead, rather than a warning of further deterioration.

Three consecutive quarters of sub-zero growth, and contraction in manufacturing and construction indices, may justify past UK stock underperformance. But surveys across Europe and the US also point to persistent contraction, if not a slowing recovery.

When global equities are increasingly anticipating central banks’ monetary stimuli during restrictive fiscal policies, the central bank-stocks transmission mechanism becomes the path of least resistance. Central banks are resorting to novel ways of monetising their nation’s debt – the European Central Bank has vowed to buy unlimited amounts of Eurozone bonds and the Fed is buying bonds indefinitely. Sir Mervyn King has cleared the way for the chancellor to drop his fiscal rules, and miss his target to get the national debt under control by 2016.

And so, as most private forecasts have revised 2012 UK growth forecasts to around -0.7 per cent, from previously issued ranges of +0.7 per cent to +0.4 per cent, the conditions remain for further stimulus.

The Bank of England has pumped £325bn in asset purchases and is already in its four-month programme to add an additional £50bn. Recent Bank minutes suggest the door is open for a further £50bn, taking total asset purchases to £425bn.

With central banks willing to shock and awe, the quickest path of transmission mechanism continues to find its way into equities. Such accommodation will likely lend the FTSE 100 a much-needed lift to 6,050 in the second half of the current quarter.

Keep informed with the expert opinion of City Index’s chief global strategist, Ashraf Laidi: