Penn Group

On 23 October, GDP growth figures released for the UK showed the economy contracting by a further 0.4 per cent, keeping the country in recession for another quarter. Despite this, the FTSE 100 index rose 0.7 per cent rounding off a strong weekly performance. This suggests that while these new adverse figures are a nightmare for the government, they should be of little concern to investors.

The first point that ought to be considered is just how meaningless these figures actually are. Apart from providing a handy stick to beat prime minister, Gordon Brown, they are actually of very little use. The information used to determine the UKs economic activity is famously inaccurate and is based on a range of assumptions and estimates as well as firm facts. Additionally, much of the data suffers from a long time lag and won’t be known with any certainty for many months. The statistics revealed on Friday are little more than a first draft and the final numbers are likely to be heavily revised. In reality, given the margin of error, a 0.2 per cent contraction is probably not significantly different from the 0.4 per cent growth widely predicted; the forecasters may yet be proved accurate.

Secondly, the market rally has had little to do with the prospect of economic recovery. When the FTSE 100 was at its lowest - at around 3,500 in March 2009 - the market was preparing itself for financial Armageddon, a second great depression that never materialised. In actual fact we just had a run of the mill recession, all be it a particularly long and deep one.

The market recovery we have seen has been primarily driven by the adjustment of expectations, although it has no doubt picked up its own momentum from increasing confidence. While it is easy to get carried away with an equity market that has risen nearly 50 per cent in nine months, the fact that the FTSE 100 is still 22.13 per cent below its peak in June 2007 suggests that investors are far from confident that the UK economy is back on its feet and raring to go.

The latest growth figures in fact do not change the investment outlook for the UK one jot; they only tell us what has already happened and mean little to forward looking equity markets. As has already been widely reported and commented upon, the UK economy is not in great shape.

High levels of corporate and personal debt limit private sector demand and a ballooning national debt also limit the ability of government spending to make up the short fall, although they seem intent on trying.

The UK has long been overly dependent on the financial services sector and despite recent reports of record profits and bonuses, the sector has shrunk dramatically and regulators seem set on limiting its expansion. All in all, the UK seems set for years, even decades of below trend growth as we all pay for our past excesses.

None of this should come as a surprise to UK investors, however. Regardless of whatever economic challenges the future holds there will still be plenty of companies who are able to exploit the current situation and prosper and the UK equity markets are less dependent on the UK economy for returns now than they ever have been. The market offers roughly the same value and growth opportunities today as it did a week ago. UK equities still offer plenty to those with a long term investment horizon and another quarter of recession should have little effect on portfolios