While UK equity and gilt prices have both increased over the last few months, we doubt that further significant price rises are likely over the coming quarters. Equities seem destined to struggle as economic growth disappoints and profit margins are squeezed. Admittedly, demand for gilts should be supported by the weakness of the economy, safe-haven demand from overseas and the potential for both a cut in interest rates and more quantitative easing. However, with the health of the UK’s public finances set to deteriorate rapidly, gilt yields may struggle to fall much further.
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