UK equities: relatively cheap

Article Abstract:

Valuations for UK equities have improved using earnings yields compared to yields for government securities (gilts). The equity market appears to offer good value, according to Lehman Brothers. Gilts yeilds have dropped and this has narrowed the gap between yeilds for gilts and equities. Growth expectations appear to have declined and higher current equity yields are sought in recompense. Pound sterling has risen in value and then fallen and this fall could continue if interest rates do not rise by as much as expected. A lower value for the pound and lower interest rates would help boost some shares such as cyclicals.

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Footsie's misplaced earnings worries

Article Abstract:

The United Kingdom has seen low inflation, with stability in inflation and real growth of gross domestic product. Equities do not appear to have derived much benefit from these favorable economic conditions. Earnings stability has not increased, and there is uncertainty surrounding the earnings outlook. It is unclear how far consumers will resist price changes by consuming less, since different factors affect consumption and prices, such as tastes and technological change. Retailers may underperform, but this means that other sectors will outperform.

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Taking positions across the 3500 divide

Article Abstract:

Optimists argue that UK share prices are undergoing a pause prior to a further rise. They see corporate earnings as improving due to a general economic recovery, aided by the Nov 1995 Budget. They also foresee low inflation and low interest rates. There is no certainty that inflation will be subdued, and there is no consensus on whether UK share prices represent a fair value. The gap between yields on index-linked government bonds and equities is narrow and this could mean that equities do not perform as well as index-linked government bonds.

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