The UK stock market staged its biggest one-day rise in 15 years yesterday, as global equity markets snapped back from their big falls of earlier this week.
The FTSE 100 surged 6.1 per cent, or 199.9 points, to 3,486.9 – its best percentage performance since the rebound that came after the crash of 1987.
Investors argued that the situation on Wednesday, when something close to panic sent the market down 6 per cent, had left the UK market oversold – although few observers were predicting that global markets are out of the woods yet. The uncertainty over Iraq and the sustainability of economic recovery, were never far from investors' minds, even as they scrambled to take part in the latest rally.
The recovery came as politicians squabbled over the relative performance of the UK market against the US and continental European bourses.
Michael Howard, the shadow Chancellor, attempted to pin some of the blame for the bear market on Gordon Brown and the Labour government. He pointed out that the FTSE 100 is 22 per cent below the level when Labour came to power on 1 May 1997, while the French market is just 3 per cent lower and the Dow Jones Industrial Average is up 10 per cent. Even using the S&P 500 index, a broader measure of the US market more comparable to the FTSE 100, American stocks are up over the period.
Mr Howard said: "Since the Chancellor imposed his £5bn a year tax on their UK share dividends, pension funds have been steady sellers of UK shares, and this is one of the factors causing the market to fall. Figures last week show that the proportion of pension funds held in UK shares has declined from 53 per cent in 1997 to 39 per cent in 2002."
The Government counters that the UK market has not fallen as far from its peak as the French or German markets.
Christine Farnish, chief executive of the National Association of Pension Funds, argued that there were more significant factors for the shift in pension fund assets away from the UK, including portfolio diversification away and the need to match growing liabilities with bonds.
She said: "It would be very nice to have £5bn back in pension funds, but it can't be the only factor. There are also the market conditions in the last few years and the fact that people are living longer. The Tories themselves did not help, introducing several changes which made pension fund management very much more expensive, for example the mandatory indexing in retirement. In the old days this was a discretionary benefit."
Robert Parkes, equity strategist at HSBC, argued that the UK market has proved less volatile than any of those to which it was being compared by Mr Howard. He said: "Of course, you are a hostage to which periods you look at. The UK did not go up as much during the boom because it had less exposure to technology companies, and it has not come down as much because it has big defensive sectors, including pharmaceuticals and financials."
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