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UK Stocks to Falter as Investors Stick With Gilts: Strategists

The U.K.’s benchmark FTSE index has suffered this year compared to the country’s currency and bonds, a trend that is not set to end anytime soon, according to analysts.

Yields for 10-year giltsfell below 1.5 percent in July and August, the lowest level seen since Bank of England records began in 1703. Ten-year gilt prices rallied 7 percent over the first 8 months of 2012.

Meanwhile the FTSE has faltered, up just 3.3 percent since the start of the January compared to the German DAX , which has seen an increase of over 18 percent.

Studying the technical data, Steven Mayne, director at EGR Broking, told CNBC the FTSE will dip again unless European Central Bank (learn more) chief Mario Draghi provided a detailed solution to the euro zone crisis on Thursday, following the bank's monthly meeting.

“Let’s see what happens this week but from a technical point of view we should be far more bearish than bullish in my opinion at the moment,” he said. “I think there’s actually going to be a pullback on the FTSE at the moment. Bizarrely, last month’s volume was very low.”

Mayne explained there was a lot of uncertainty in the market and that movements are currently being dictated by news on the euro zone. Technical indicators, he said, pointed to a downward turn for the index.

Data released on Monday showed that the manufacturing downturn in the U.K. eased slightly in the last month. The purchasing managers' index (PMI) for August jumped to a four-month high of 49.5 from 45.2 in July for the U.K., but showed that it was still contracting.

Nicholas Spiro, managing director at Spiro Sovereign Research, highlighted the stocks versus bonds dichotomy.

“The U.K. is very much a tale of two halves, a spectacular rally in the bond market for the simple reason that it’s obviously a safe haven, not in the euro zone ... and an economy that is flat on its back,” he told CNBC.

Spiro made a connection between the austerity put in place by the U.K. government and a poor performing stock market.

“This obviously appeals much more to the bond market and [Finance Minister George] Osborne has been talking that story up very effectively,” he said. “Mr. Osborne is doggedly sticking to a plan which is clearly costing the economy a lot. But unfortunately obviously something which needs to be done.”

Osborne announced this week a drive to boost infrastructure and business lending to try to pull the U.K. out of recession (learn more). On Tuesday the conservative-led government is also set to reshuffle roles within the cabinet to freshen up its approach.

George Godber, founding partner and fund manager at Matterley Asset Management, is certain that policymakers need to do more.

“What I think we are lacking is still clear direction from the top, from the government level,” he told CNBC. “I sort of think that there are segments in the U.K. economy that are extremely bleak, overall the corporate sector, the private sector, is in better health.”

Godber was dismissive of new schemes that had been announced, such as home building, saying these were “nothing revolutionary.” He also thought the Funding for Lending scheme, brought in by the Bank of England in August to urge British banks to lend more to small businesses, could prove fruitless.

“I think it’s unhelpful. I think what we’ve seen as a whole, companies, consumers, aren’t willing to take on more debt at the moment,” he said. “There are areas of blockage within the credit system, but actually I don’t think a government backed bank is suddenly going to provide a golden bullet.”

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