Positive data that is currently boosting equity markets will cause the rally to overshoot, leading to economic growth in Britain in the second half of 2009 but a weak 2010. This is the view of Georgina Taylor, equity strategist at L&G Investment Management.
Taylor also says 2010 will be a year of “lacklustre” GDP growth beside a weak recovery, not the V-shaped spike some commentators have suggested.
She says that in the short term, economic data will continue to be better than expected. This will support riskier assets over the next few months, but equities still remain vulnerable and there is a danger of expectations being revised up too far.
“Previously in September we were looking towards 2010 for some growth, but we now think this will be earlier. We are seeing response to policy action, and news is getting less bad. Economic growth should improve for the second half of the year but we now see 2010 with weaker economic and profits growth.”
Taylor adds that credit conditions are critical to equity markets and the kind of recovery we can expect. She is encouraged that credit conditions are starting to ease, but has concerns that people are not as willing to borrow as in the past. Without borrowing the recovery will be muted, but the cost of borrowing is coming down.
She says L&G economists predict a bounce in growth which will flat-line next year. However, there is a vast difference between the group’s best and worst case scenarios for the next 12 to 18 months.
In the worst, where deflation takes hold and growth remains weak, growth in 2010 would be zero and the FTSE 100 would fall back to 2,800, a 36.3% fall from current levels.
In the best case scenario, policy would start to drive economic recovery and profits would enjoy a more typical cyclical recovery. In this instance, the FTSE 100 would rise to 6,500, a 47.8% uplift from current levels.
However, L&G’s strategists expect that the most likely situation is a period of weak demand, causing below average growth in 2010. The FTSE will trade at about the 4,800 level, providing 9.1% upside from today’s levels.
L&G upbeat on British recovery