Economic growth remains remarkably buoyant
By Chris Tracey, JP Morgan Fleming investment director
The FTSE All-Share Index fell 13.3% over the year, beaten by gilts, which produced a positive 3% according to the FTSE All Stocks Index. However, cash was king, with a positive return of 5.2%.
Although the behaviour of UK equities may not have been particularly noteworthy in a global context, the UK economy stood out for its remarkable buoyancy, particularly in the latter half of the year when Europe and the US had more or less ground to a halt. But that strength is extremely skewed towards the consumer and away from the industrial sector, which has been in recession for as long as it's US equivalent.
Our conclusion is that interest rates are highly unlikely to fall any further, but on the assumption that the growth in consumption will ease, we do not believe that there is any imminent threat of a rise.
EPS on the All Share fell last year, we estimate, by around 5% and will rise this year by a similar amount. Both numbers are lower than their US and European counterparts because the UK quoted sector has a much lower cyclical content.
Therefore, although UK equities are not the best plays on a global upturn, at around 18 times this year's earnings their valuation is at a significant discount to that of US equities so, for the time being at least, we intend to remain overweight.
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