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LARGE CAPS FACE HEADWINDS BUT UK SMALL COMPANIES HAVE THE WIND AT THEIR BACK

The FTSE 100 has been showing signs of vulnerability over recent months, dragged lower by downgrades to earnings forecasts. On closer inspection, the cause of this is patchy growth in many emerging markets and the recent strength of sterling impacting the globally diverse large caps.

With the economic recovery in both the US and mainland Europe still proving sluggish and many emerging market GDP forecasts being revised downwards, the UK economy is proving, dare we say it, a beacon of light. UK GDP growth forecasts have consistently edged higher with 2014 growth now expected to be 2.7%. Most encouraging of all is the expansion in business investment which had been rather slower to participate in the recovery than the consumer. This bodes well for UK small and micro caps, and we are seeing a steady flow of earnings upgrades, not downgrades, for domestically based UK smaller companies.

Domestic demand is driving the manufacturing sector, which has reported its eleventh successive month of expansion. Jobs growth is at a 33-month high, which in turn continues to support consumer sentiment, and the service sector continues to see good growth. The construction sector has sprung back to life with house-building activity heading back towards 2007 levels. Businesses are investing once again – both in staff and capital equipment.