FTSE seen falling sharply on the year

LONDON: Britain's top share index is expected to register a drop of nearly 11 percent on the year as investors focus on the euro zone debt situation and its potential to wreak havoc on the financial system.

Median forecasts of 22 equity strategists from a survey taken in the last 10 days indicated the FTSE 100 would trade at 5,275 by end-2011, having closed at 5,217 on Wednesday.

The index started the year at 5,899.

A smaller sample of 20 saw the index reaching 5,550 by mid-2012 -- a 6.4 percent advance from the close on Wednesday.

The results were lower than a poll in June which showed the FTSE ending 2011 at 6,150 and reaching 6,300 in mid-2012.

"I would say that there is potential for upside on the FTSE, but I think the likelihood of any economic growth has been stunted severely by what's happening in the euro zone," Martin Dobson, head of trading at Westhouse Securities, said.

"There's so much talk now (of) going into a double-dip recession I think it is fairly inevitable that the next six months/nine months are going to be very difficult for any growth to be material."

The median probability of a second recession in the United States, euro zone and Britain has climbed to roughly one in three, Reuters polls showed.

Miners, whose performance is closely correlated to global growth, stand to suffer particularly from a slowdown and the sector , heavily weighted on the UK blue-chip index, has fallen about a third this year.

"Miners will remain volatile and a lot of mining prices will depend on whether we see extra stimulus from the United States ... which still has big question marks over it," Joshua Raymond, market strategist at City Index, said.

"A lot of it is also related to emerging market demand for metals ... If there is a strong slowdown in global activity, it will have a big impact on China and the miners as well."

The FTSE 100 is down over 11 percent on the year, having gained 9 percent in 2010.

The index sank about 7 percent in August, its biggest monthly fall since February 2009, partly on fears of a repeat of the 2008 credit crunch, given banks' exposure to the euro zone's weaker economies, such as Greece, Italy, Spain and Portugal.

"The fact we saw such a move down in August for me that (marked) a big change in sentiment for the FTSE in the last couple of years, and that was the beginning of a change in trend," David Jones, chief market strategist at IG Index, said.

"I think this European debt problem is not going to go away it's going to weigh over markets at least until the end of the year, and the risk is shocks to downside."

European leaders are endeavouring to agree to a comprehensive package to try to solve the euro zone debt crisis, but divisions exist between member states on how to go about it.

Markets remain volatile, as investors grab hold of any kind of action from policymakers that could help the debt crisis, only to go into shock over any obstacles.

August saw the FTSE 100 volatility index, a barometer of investor anxiety, jump 49 percent, and its sharpest monthly rise since September 2008 when US investment bank Lehman Brothers collapsed.

The FTSE 100 trades on a one-year forward price-to-earnings ratio of 8.7 times, against a 10-year average of 14 times, Thomson Reuters Datastream data showed.

Whilst there are potential bargains out there, corporate takeover activity has slowed, with global M&A deals during the third quarter totalling $539 billion, down 23 percent from the second quarter, data from Thomson Reuters showed.

This marks the second consecutive quarterly decline for worldwide M&A and the lowest quarter for overall deal-making activity since the first quarter of 2010.

"M&A moves in cycles like the market and (with) the future for global economies not looking so rosy, businesses are holding back funds available to them for expansion," Angus Campbell at London Capital Group said.

"As a result we are not going to see M&A activity being quite so explosive," he said.

The majority of equity strategists polled in June have reduced their forecasts considerably. Out of 10 common contributors, nine cut their end-year targets by an average of about 700 points, while one upgraded its forecast.

The biggest downgrade was by 1,300 points, while the biggest upgrade was by 400 points.

Some of the contributors to previous polls refrained from giving forecasts this time round, or have them under review, blaming the recent market volatility.

"The fundamental outlook is cloudy, and we have to work harder to come to a sensible conclusion on how the markets might perform over the medium term," said Jeremy Batstone-Carr, strategist at Charles Stanley, who declined to take part in the current poll.

Copyright Reuters, 2011