Threadneedle: Recent progress of UK equities will be hard to maintain

Leigh Harrison, Head of UK Equities and manager of the Threadneedle UK Equity Alpha Income Fund, explains: "We've come a long way in a short space of time, but that move has been fuelled largely by relief that the authorities have managed to prevent complete meltdown in the financial system.

"The Bank of England's Special Liquidity Scheme is helping to resolve some of the debt and liquidity problems in the banking sector, but we are still concerned about the economic outlook. We expect the data to continue to deteriorate over the coming months, with poor readings likely on house prices, employment and retail sales."

This will inevitably have a knock-on effect on corporate earnings, as Harrison points out: "Earnings expectations are still too high, especially in consumer-related areas. With inflationary pressure rising but wage increases limited, consumers are going to feel the pinch this year, so areas like retailing and leisure could see much lower demand."

However, it is not all bad news. The UK market's relatively high weighting in mining gives it enviable exposure to robust emerging market growth and this will help to support earnings at the aggregate level. In fact, Threadneedle is forecasting 4% earnings growth for the UK market, higher than the growth it expects from the other developed markets. This 4% figure masks a high level of divergence between sectors, however, and Threadneedle's portfolios reflect this with overweight positions in materials and underweights in consumer areas.

Looking ahead, Harrison is keen to stress the opportunities that will arise: "We are in for a difficult period in the economy and, with the stock market having had a decent bounce in April, further progress may be harder to come by. Nevertheless, in volatile market conditions there will be clear opportunities for long-term investors to buy good quality growth franchises at attractive prices. This is what we will be doing for our clients."