The positive performance of the FTSE 100 this week has been helped by the improving expectations with Prime Minister Rishi Sunak "taking the lead and his embrace of a more acceptable fiscal policy" for investors, Fadi Reyad, chief market analyst at CAPEX.com MENA said.
However, Reyad warned the British economy remained exposed to a possibly longer and sharper downturn as interest rates continued to rise and the global economy slowed down.
He added: “The direction taken by the new government could ease the concerns around the country’s financial position.
“While the stock market could record some volatility and price corrections after the central bank’s decision later this week, traders could observe GDP and inflation figures later this month for clues on where the economy is headed.”
Rupert Thompson, investment strategist at Kingswood, agrees the news surrounding Sunak’s appointment as prime minister has helped bolster confidence in the return to economic orthodoxy.
“UK assets had a good week, with a further reversal of the sell-off caused by the mini-budget. The pound rose 3.8 per cent against the dollar and is now back up to $1.15, some 3 per cent higher than the day before all hell let loose and is 10 per cent up on its low," Thompson added.
“As for UK equities, they gained 1.6 per cent over the week, outperforming other markets. UK mid-cap, which has had a torrid time of late, bounced as much as 5 per cent. Even so, UK stocks still remain a little below their levels prior to the "mini"-budget.
“The announcement that the fiscal statement, which will be critical and will set out the government’s medium term fiscal plans, would be delayed until 17 November was greeted with no more than a shrug."
One sector that is seeing strong earnings is the energy market - thanks to the developments in the oil and gas markets.
Reyad said expectations of stronger demand for oil could help maintain solid earnings for BP and other energy companies.
The banking sector remains, however, in a more delicate position as interest rate hikes could improve margins while a slowing economy could lead to fewer and worse loans.
As a result, the real estate sector could also see an increasing impact from rising interest rates and could take a hit after the Bank of England’s decision.