By Nicholas Dockerty
On the first trading day of the New Year, 4 January 2011, the FTSE 100 gained an impressive 113.93 points finishing the day at 6013.87. The 6000 level is symbolic as the FTSE 100 was last seen trading around this level before the financial crisis started in earnest back in 2008 when the index fell as low as 3512. And when you consider the low for 2010 of 4805.75, which happened at the start of July, the UK’s leading index has come a long way indeed.
But how will the FTSE 100 perform in 2011?
It’s difficult not to stumble upon a piece of negative economic information or commentary in the UK at the moment. Inflation is steadily increasing, up 3.3% in November and not what the government had predicted in its target. A VAT rise of 2.5% to 20% has many analysts fearing a fall in consumer spending once the Christmas and New Year peak period is over. Unemployment in on the up too, a third-quarter gain of 35,000 now means that the total unemployed in the UK is 2.5 million and, according to various projections, will rise even more through 2011 as the economy struggles to replace the lost public sector jobs with private sector ones.
The UK GDP figure was revised down from 0.8% to 0.7% for the third quarter in 2010 suggesting that the recovery will be a slow one. The latest Nationwide Building Society survey recorded a rise in house prices for December but said that UK house prices were likely to fall throughout 2011.
So why are investors in such a positive mood? One explanation is that the FTSE 100 consists of a significant amount of global companies with some 65% of revenue coming from overseas nowadays. At this point, some of the FTSE 100’s best performing companies are reliant on high commodity and natural resource prices brought about by China’s continuing rapid economic growth.
Therefore, perhaps a much more realistic gauge of the UK economy is the FTSE 250, but that index climbed 23% in 2010.
Analysts argue that another reason why equities are going up is that difficult economic conditions tend to favour the fittest, most effective companies and as merger talk and cost cutting exercises proliferate there then comes a tipping point, in the minds of some investors at least, during which the potential for growth in an individual company outweighs the prospect of decline.
And with the global economy looking set to experience another year of ups and downs equities are just looking a more attractive option for investors at the moment.
These are some of the reasons why we’re seeing a difference between what is happening in the underlying economy and the stock markets in the UK at the moment. But what do you think will happen throughout 2011?
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