Despite the comparative strength of the UK’s economic recovery, UK equity prices have continued to underperform those in other developed markets. While the recent underperformance may have partly reflected the UK equity market’s relatively high proportion of financial and mining firms, which have struggled globally, recent falls also seem to have reflected concerns that the recovery is doing little to boost profits. Indeed, a large majority of equity analysts have continued to revise down their forecasts for corporate earnings despite the recovery’s strong pace. This pessimism may prove to be unwarranted. If productivity rebounds as it has done in past economic recoveries, then corporate profit margins should gradually improve, helping equity prices to recover from their recent falls.
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