UK stock market is attractive, but UK economy is less so

James Macpherson, BlackRock's Head of UK Equities and manager of the BGF UK Fund said: "Although the UK stock market has made handsome progress since March, it still remains attractive. UK shares offer very good value, ahead of what investors can expect from Government bonds, corporate bonds or commodities. Part of this is because the UK stock market is highly international. Out of every £10 of earnings, £7 comes from overseas. Quantitative easing is likely to continue for some time. We can expect persistently low interest rates since Central Banks are not going to run the risk of raising interest rates too quickly and opening the door to a double dip recession.

"Banks and financials are particularly attractive. Many are heavily exposed to overseas revenues and they tend to have higher operational gearing, where a greater proportion of rising revenue flows through into profits, than other businesses. Confidence has not fully recovered which means money available for investment is more likely to find its way into financial assets rather than into tangible investments - such as industrial capacity, corporate expansion or property - which require longer term commitment. Alternatively companies seeking to expand are finding that buying other businesses is cheaper than building new capacity.

"Other sectors have less to offer. Many consumer-exposed sectors actually performed well through the recession of 2008/09 since they were suffering before the storm hit. Retailers bottomed in December 2007. Looking ahead, companies exposed to the UK consumer can expect headwinds next year as VAT and income tax increases are felt and unemployment continues to rise. And we won't enjoy the benefit of another fall in the price of oil, which helped consumer spending in 2009."