Why UK equities are poised to go higher

Since 2003, companies have achieved significant increases in profits but their shares are no more highly rated than three years ago. The overvaluation equities experienced near the end of the last bull market are not yet in sight.

The UK equity market appears poised to climb higher. The FTSE 100 Share Index the week before last reached a five year high, although this index is still below the peak seen in 2000, while the FTSE 250 has again recorded a new all-time high. Nevertheless the market is in our view reasonably rated with the average estimated P/E for 2006 at around 13 x. Strangely this is the earnings rating of the UK equity market at the time of its low point in March 2003. In other words, companies have since then achieved significant increases in profits but their shares are no more highly rated than three years ago. The overvaluation equities experienced near the end of the last bull market are not yet in sight.

The first quarter statements, expected shortly, will provide a confirmation that our expectation of about 8% earnings growth in 2006 is feasible. Many UK companies possess large international operations and world economic growth could, according to the IMF, reach 4.9% this year.

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