UK equities rally despite struggling economy

The FTSE 100 has climbed to its highest level since May 2008 as expectations for global economic growth have improved. Some have suggested that a “great rotation” of funds out of safe to risky assets is now underway. After all, the fact that earnings yields are much greater for equities than for gilts provides a strong incentive for investors to rebalance their portfolios. However, we think that hopes of stronger global and domestic economic growth this year will be disappointed. So, although the rally in equities may maintain some momentum in the near term, we think that the FTSE 100 will finish the year close to its current level.