Barclays Stockbrokers 2009 outlook for the FTSE

Henk Potts, Equity Strategist at Barclays Stockbrokers said: Our best estimate is that the FTSE 100 will be around the 4700 level by the end of next year. In terms of price rises, this suggests around 11% upside from today's levels. We base this forecast on the outlook for corporate profits and dividends and apply this to what we believe is a reasonable valuation for the market. On the former, we expect that earnings (and consequently dividend growth) for FTSE 100 companies will fall further in 2009, probably by around 20%, as the full impact of the global recession bites. However, with the market currently trading on a historically low single-digit PE ratio, we believe that share prices should recover as the pace of the economic slowdown slows and risk-appetite returns. Factoring in our earnings and return assumptions, this would leave the FTSE trading on a PE of a little over 10 times, significantly below the average level it has traded at over the last 15 years.

Furthermore, the recent sell-off in markets has left UK equities trading on an extremely attractive dividend yield of over 6%. As mentioned above, we expect to see some companies hold or even cut their dividends in 2009, which will have a negative effect on dividend growth. That said, we still expect the market to generate a total return in excess of 15% in 2009.

However, although we are expecting to see the FTSE produce a positive return in 2009, we are not expecting the journey to be smooth. The current tone of economic data is uniformly bad, and we expect the fourth quarter of this year to be the worst quarter for the major western economies for some years. Conditions are unlikely to improve significantly in the first quarter of next year either and against this backdrop equity markets will struggle. Consequently, we expect to see further volatility in the first few months of the New Year. Towards the end of the first half of next year, however, we expect the global economy to show signs of stabilisation, meaning that equities -- given their forward-looking nature -- should start to recover in anticipation of a return to economic growth in 2010. So our profile for next year is one where equities will be volatile for the first few months of 2009, but then start the long road to recovery.