Strong month for UK equities

The UK market was the best-performing developed market in July and, within that, UK growth stocks saw the strongest gains. The FTSE 350 Low Yield index delivered 10.7% against a return from its higher-yielding counterpart of 7.9%

.The FTSE 100 index of leading stocks rose 9.4% over the month, outstripping developed markets such as the US, where the S&P 500 rose 6.89%, and Europe, whose FTSE Eurofirst index was up 4.92%. In Japan, the Nikkei was significantly weaker.

There was a slow drip of good news from the UK economy. GDP growth hit 1.1% from April to June, which was significantly ahead of analysts’ expectations of a 0.6% rise and the fastest quarterly expansion since 2006. This represented a promising pick-up from the first three months of the year when the economy expanded just 0.3%. The construction sector showed particular strength.

In contrast to the US, unemployment figures were also better than expected – raising hopes that the private sector may yet be able to take some of the slack from public sector job cuts. UK manufacturing output showed the strongest growth in 15 years.

The news was not all one way, however. Public sector borrowing came in higher than expected. Equally, at the start of the month, the International Monetary Fund dropped its growth forecast for the UK citing the austerity measures in the Emergency Budget.

Nevertheless, markets were happy enough with the economic news and more than happy with many of the corporate results during the month. The insurers, notably Aviva and Prudential, posted results ahead of expectations and many of the banks returned to profit.

The biggest problems now facing the UK are external. The weakness in the US is a potential headache as its economic data continues to disappoint. Economic growth fell short of expectations, coming in at just 2.4% for April to June. Housing statistics and jobless figures also weakened. As a reflection of this, sterling hit a six-month high against the dollar towards the end of the month. There also remain continued worries about the strength of Asian growth although the eurozone keeps defying expectations and may yet offset the weakness in the US.

The average fund in the UK All Companies sector is still ahead of the UK Equity Income sector over the year to date, having returned 4.49% against 3.95%. However, the showing of the UK All Companies sector has been skewed by the punchy performance of a number of aggressive growth funds. The top fund in the sector has returned 36.9% so far in 2012 while the top fund in the UK Equity Income sector has returned just 16.4%.