Upside potential still there despite record rally

The dramatic turnaround in the fortunes of the UK equity market during the past eight months or so has led many investors to wonder how much further the rally can run, how likely a short-term correction is and how they should be positioning portfolios as we go into 2010.

Back in March we had witnessed the third largest equity market fall in over 100 years, valuations had fallen to just seven times trailing earnings and earnings forecasts were being cut by around 40% from peak levels. Heading into 2010 we believe earnings expectations are still too low, primarily in cyclical areas. This is particularly the case given how tightly costs have been managed in the downturn – operational gearing should be a powerful positive force next year. We also expect to see somewhat higher sales growth in 2010 than is currently forecast, due to a more powerful inventor...