Economic outlook remains grim: Threadneedle

Leigh Harrison, head of UK equities, said the asset manager had made further downward revisions to its forecasts for this year and now expected UK GDP to contract by approximately 3 per cent.

He said: "Although activity is likely to be on an improving trend by year end, we do not expect growth to return to positive territory until well into 2010.

"There will also be a sharp increase in unemployment this year as companies shed excess capacity built up during the boom years."

He said Threadneedle was bracing itself for one of the most difficult reporting seasons in recent memory.

"Over 2009 as a whole, we are forecasting earnings at the aggregate level to fall by around 15 per cent," he said.

"Dividends, too, are under severe pressure and likely to fall by a similar amount."

He said Threadneedle was aiming to maintain dividend payments on its equity income funds, but that it would be “a challenge”.

Harrison said Threadneedle expected sentiment to oscillate between a pessimistic outlook, characterised by concerns about the government’s "ability to fund support packages", and a more optimistic view that the authorities had acted promptly and that economic recovery was “around the corner”.

He added: "This ebb and flow is likely to leave the market trading in a fairly wide range. But if we fast-forward 12 months, 2010 is likely to feel better than 2009 and, at some point, investor sentiment will start to factor this in."

Using the market’s likely short-term range to add to equity weightings could therefore prove to be a "fruitful long-term strategy", he said.

Harrison said Threadneedle remained defensively positioned at the moment, reflecting "likely poor news flow" around the upcoming reporting season.

But on a three-year view, the company is "very positive" and looking to move portfolios to a "more aggressive stance" in the coming months.