Analysts remain sanguine on outlook for the FTSE 100

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The Independent Online

As the FTSE 100 plunged 4.1 per cent, analysts and investors were left wondering whether the past few weeks were a dip on the way to a recovery at the end of the year or a harbinger of worse to come.

Last December, City analysts thought the blue-chip index would be heading for 7,000 by the close of this year. Yesterday, the index fell to 5,858, a level last seen in late September 2006, prompting at least one analyst to wonder whether this is a "giveaway market, the sale of the century".

The most optimistic viewpoint now comes from Lehman Brothers. They have left their forecasts unchanged, and see this as "a period to take stock of key indicators. Short-term nervousness makes the immediate dynamics unpredictable, but the market will end the year higher." In the latest market outlook, they do not view the credit crisis as being as serious as those in 1998 or 2002.

Indeed, UBS cites the average peak-to-trough bull market correction over the past 15 years as being 8.4 per cent; at the moment, the market is down 13 per cent from its recent peak.

Morgan Stanley said underlying fundamentals remain "supportive".

Hargreaves Lansdown has tempered its optimism, but is still hopeful. An analyst called it similar to what was experienced in 1994, with the market trading on fear and a big need for the repricing of risk and credit, which had become excessively undervalued.

Meanwhile, Killik's Graham Neale said: "Equilibrium levels, when volatility returns to normal levels, are expected to be considerably lower than previously forecast. Apart from a select few large-cap shares, we are not moving back in quite yet. By Christmas, we hope to be in better cheer."