Goldman Sachs has raised its short-term target prices for London's benchmark index, the FTSE 100, saying that the index has been a relatively weak in dollar terms in spite of its strong performance year to date.

In a strategy note on Wednesday, the US bank said that the FTSE 100 has risen sharply in 2013 so far, up nearly 10%, but only in sterling terms.

Goldman said: "The sharp fall in real rates and decline in sterling in recent weeks has put the UK in focus. These factors combined with a decline in credit spreads has lead to a marked easing in UK financial conditions. Our economists argue that the combination of sluggish growth, significant spare capacity and weak inflationary pressures will be sufficient to justify further easing."

However, when compared with the largest 20 markets across the globe and ranking them on their dollar returns, the bank has found that the UK comes a below-average fifteenth, with only Italy being the other weaker market in Europe.

"This is all the more surprising given that a lot of UK earnings are dollar- (or at least non-sterling) based," Goldman said.

To reflect the easing in conditions and fall in sterling, the bank has raised its FTSE 100 targets over the next three, six and 12 months from 6,200, 6,300 and 6,500, respectively, to 6,600, 6,800 and 7,200.

The bank highlighted that the second-tier FTSE 250 has benefited more than the resource- and bank-heavy FTSE 100 due to its greater exposure to the industrial cycle. It is now trading at a 20% premium to the top-tier index.

"We continue to prefer the UK international exposed names these have performed in line in recent weeks with the UK domestic names despite the fall in sterling," Goldman concluded.

BC

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