Rathbone's Chillingworth predicts bear market rally

The UK market is on course for a short-term rally, although we have not seen the end of the credit cr...

The UK market is on course for a short-term rally, although we have not seen the end of the credit crunch, according to Rathbone’s CIO Julian Chillingworth.

“Since June, equity markets have had a torrid time, and they are now looking seriously oversold on a technical basis,” he said.

“This means we could experience quite a strong bounce in the near term, which would undoubtedly help sentiment. However, my guess is that this will be nothing more than a bear market rally.”

Chillingworth said since June equity markets have seen a sell-down of around 18%, although positive news from the US banking sector last week buoyed the FTSE, which recorded a weekly gain of 2.18%.

“But economic fundamentals in the US have got no better; data are yet to trough, and the economy has not bottomed out. Problems are continuing with the banks, both in the UK and the US, although we are now getting to a stage where the wheat is being separated from the chaff. Life also continues to be tough for the consumer with inflationary pressures still working their ways through the system,” Chillingworth said.

“Our conclusion is that there will be a short-term rally over the next couple of months, but it will not be sustained. In order for a recovery in earnest, investors will need to see a basing out of the economy and earnings back to more realistic levels. The oil price will continue to have a key impact on margins and sentiment. We should start to see the green shoots of a recovery during the first half of 2009, but we haven’t seen the last of the credit contraction yet,” he added.