UK equities have continued to underperform relative to overseas indices despite the comparativestrength of the UK’s economic recovery. This seems to have partly reflected concerns that the UK’srecovery is still not feeding through to a pick-up in stockmarket earnings. Indeed, a large majority ofequity analysts have continued to revise down their earnings forecasts over the last month. Wesuspect this pessimism may prove to be unwarranted. If productivity rebounds as it has done in pasteconomic recoveries, then corporate profit margins should improve gradually. Meanwhile, thelikelihood that low inflation gives the MPC scope to raise official interest rates more gradually thanthe markets currently expect should provide some support to equity valuations.
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