Britain's top shares rose on Tuesday, led by miners on hopes for an improved outlook for demand, although investors were wary that the first-quarter earnings season might not be enough to spur further market gains The FTSE 100 closed up 36.27 points, or 0.6 percent, at 6,313.21, building on an advance from the previous session when it rose 0.4 percent.
But traders noted a lack of conviction, seen in "scrappy" trade which saw the index dipping below 6,300 a number of times, saying some investors were reticent about placing any large bets before the US earnings season gets underway in earnest. US aluminium group Alcoa posted a better than expected profit on Monday to kick off the reporting season.
Other big US firms are set to report results during the week, including J. P Morgan Chase and Citigroup, a particular focus for investors in British blue chips given the latter earn around a quarter of their revenues in North America. US first-quarter profits are seen rising just 1.6 percent from the year-ago quarter, according to Thomson Reuters data. In January, earnings were seen rising 4.3 percent.
While strategists said this scaling-back of forecasts might mean firms will more convincingly beat expectations, the FTSE 100, up more than 7 percent in 2013 and near five-year highs, could struggle to make much more progress. "Even if we do get good earnings is it enough to justify a lot more on these markets?" said IG market strategist David Jones.
Aside from aiding broad sentiment, Alcoa's earnings helped lift miners 4 percent - up for a second day and recovering from seven-month lows set at the end of last week - with the firm viewed as a bellwether for the materials sector. Miners were also boosted after China, the world's top metals consumer, reported lower-than-expected inflation data, fuelling expectations that its monetary stimulus would stay in place.
The sector has slid more than 9 percent in 2013 on concerns over falling demand and rising prices, with its 12-month forward price/earnings (PE) ratio at 9.58 times compared to the FTSE 100 index on 11.49 times, according to Thomson Reuters data. In general, cyclical sectors that rise with optimism over the economy outperformed those seen as defensive plays against economic uncertainty, with banks ahead 1.1 percent.
This countered the unusual theme which has characterised market trends so far this year, with defensive stocks outperforming cyclical counterparts in rising markets. The beverage sector has risen some 13 percent. However, Tuesday saw a rotation out of highly-rated defensive stocks, with Diageo leading the fallers with a 2.6 percent drop. Chris White, UK equity fund manager at Premier Asset Management, has been reluctant to invest in what he refers to as "really obvious defensive stocks".
These include drinks group Diageo and consumer goods groups Unilever and Reckitt Benckiser, which are trading on respective 12-month forward SmartEstimate PE ratios of 18.1 times, 18.8 times and 16.9 times, according to Thomson Reuters StarMine data. "(I am) just feeling that they've got ahead of themselves, and frankly if they... fell 20 percent I wouldn't necessarily be surprised," White said.
He prefers stocks such as telecom operator BT, retailer Tesco and security group G4S, which offer valuation support - on 12-month forward SmartEstimate PEs of 10.5 times, 11.2 times, and 11.7 times.