The outlook for the UK economy is far from rosy. The Organisation for Economic Co-operation and Development and the European Commission reckon that growth will slow next year .
And many of Britain's directors are not confident about the outlook for their businesses. It seems that speculation over the severity of the Government's austerity measures has spooked them. So, as businesses invest less, scale back expansion and curtail hiring new staff, the UK economy could quickly lose momentum.
Despite the obvious concerns, it is important to distinguish between what could happen to the economy and the impact this may have on the London stock market. The two are not inextricably linked. The steady climb in the benchmark index since June highlights the level of disconnect between the stock market and the economy. The FTSE 100 managed to rise to a four-month high this week. It is now within touching distance of 5,825 points – the high for this year.
The FTSE 100 is a rich cosmopolitan index that boasts a host of multi-national companies, for whom the rest of the world is more important than Britain. Around 70 per cent of FTSE 100 company profits are generated outside the UK. Investors who are looking to diversify their portfolio geographically need look no further than an FTSE 100 index. This can be done simply and inexpensively through Exchange Traded Funds (ETFs) and index trackers. Index trackers may not seem like sexy investments at first. Paradoxically, if you are honest enough to acknowledge that it is almost impossible to second-guess which region is likely to outperform and invest in a broad-based index tracker instead, then a non-sexy investment can suddenly become quite sexy.
David Kuo is a director of financial advice site fool.co.uk