Stagflation fears hold UK equities back

The recent poor run of news on the domestic economic recovery and fears that the Monetary Policy Committee is moving towards hiking official interest rates soon in response to high inflation appear to have raised concerns that the UK is heading for a period of ‘stagflation’. These concerns have perhaps been most evident in the UK equity market. While equities have continued to rally abroad, reflecting the improvement in the prospects for global economic growth, the FTSE 100 has only managed to hold steady. We continue to think that the FTSE 100 will fall later this year, primarily reflecting the sluggishness of the UK’s economic recovery.