UK economy expands rapidly in the second quarter

Although the UK stockmarket ended August in negative territory, its performance over the month as a whole was significantly better than that of many other major equity markets.

Investors were encouraged by some better-than-expected economic data, which fuelled hopes of a sustained economic recovery. In particular, encouraging US consumer confidence data provided a boost for investor sentiment towards the end of the month.

The FTSE 100 index declined by 0.6% during August, although underlying performance was mixed and share prices experienced some volatility during the month. Medium-sized and smaller companies suffered more than larger companies as investors shunned higher-risk market areas in favour of blue chip securities.

The UK economy grew more quickly than expected during the second quarter of 2010 while retail sales rose by more than expected during July, boosting hopes the country’s economic recovery might be gaining strength.Meanwhile, consumer confidence posted an unexpected increase during August. Even so, despite some encouraging data, the Bank of England’s stance on the economic outlook remained relatively pessimistic, at least in the short term.

Shares in WPP, the world’s largest advertising company, tumbled during the month after the group remained uncertain about the outlook, particularly in the light of possible fiscal contagion in Europe from Greece, Spain, Portugal and Ireland.

Takeover speculation increased towards the end of the month, with names such as Cable & Wireless, Weir Group, Charter International and Tui Travel the subjects of discussion. Meanwhile shares in energy engineer Amec were boosted by strong first-half profits and the company’s dividend payout was raised by 20%.

The aftershocks from BP’s massive oil spill in the Gulf of Mexico continued to reverberate during the month and the group’s share price remained vulnerable to ongoing speculation about the extent of its liabilities. Meanwhile, the wider oil sector was not helped by the falling price of oil and UK oil explorer Dana Petroleum became the subject of a hostile takeover bid by Korea National Oil, having rejected its initial approach.

According to data released by the Investment Management Association during August, the UK All Companies sector experienced positive net retail sales during June, whereas the UK Smaller Companies sector suffered net redemptions and was one of the least popular groupings during the month. The UK Smaller Companies sector did perform significantly better than its UK All Companies counterpart on a one-month basis, although both groupings generated negative returns.