A recovery in beaten-down financial stocks pushed Britain's benchmark share index higher on Tuesday, although volumes were thin, indicating a lack of conviction in the rally due to fears over the euro zone debt crisis and the weak global economy. The blue chip FTSE 100 index closed up 0.7 percent, or 36.74 points, at 5,664.07 points, recovering from two consecutive days of losses that took more than 1.1 percentage points off the index.
Trading volumes, however, were thin as many chose to stay on the sidelines due to persistent fears over the euro zone crisis and the weak economic backdrop. Volumes for the FTSE 100 came in at 66 percent of their average 90-day volume.
Royal London Asset Management fund manager Jane Coffey remained relatively bullish over the FTSE's prospects in the medium term, arguing that investors would increasingly favour equities over lower-yielding cash or bond investments.
"In the medium term, we still see further upside and we see the index finishing the year around the 6,000 point mark," said Coffey.
"With average earnings multiples of 10 times and a yield of 4 percent, why wouldn't you put your money in equities?" she added.
French bank Societe Generale also said in a strategy note that the UK equity market appeared to be "very attractive", and recommended switching out of US equities and into UK shares.
Coffey's portfolio is "underweight" on financial stocks and "overweight" on mining, oil and industrial stocks, but financial shares were among the FTSE's best-performers as bargain-hunters picked them out after recent sharp falls in the sectors.
Prudential Plc topped the FTSE 100 leaderboard, rising 3.3 percent. Rival insurer Legal & General rose 2.1 percent, while the FTSE 350 banking sector gained 1.3 percent.
"Financials have generally been stronger across the board today, and Prudential's benefiting from that," said Central Markets chief strategist Richard Perry.
British engineer GKN and aerospace group BAE also featured prominently on the FTSE's leaderboard, rising 3.3 and 2.7 percent respectively on expectations of contract wins at this week's Farnborough air show. The FTSE 100 has remained above the 5,600 level since breaking above that mark at the end of June, but has failed to stay above the 5,700 level after having reached an intraday high of 5,727.45 points on July 5.
Several traders said they would not take up new positions on the back of the rally due to worries that the market could soon fall back due to the uncertain economic outlook and persistent worries over the euro zone crisis, which has resulted in bailouts for Spain and Greece.
"We're sitting on our hands. We don't want to be buying into light volumes," said Securequity sales trader Jawaid Afsar.
However, XBZ Ltd European equity options broker Mike Turner said some investors were turning increasingly bullish on equities, viewing them as a safer haven than many European government bonds.
"I'd steer clear of euro zone bonds for now. I think equities are looking, for the short term at least, as a safer haven than most," he said.
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