Positive news includes an acceleration of activity in the UK services sector, improved manufacturing, construction and retail data, a pick-up in car sales and rising house prices buoyed by the Funding for Lending and Help to Buy schemes.
Confidence in the recovery is growing and expected to gain momentum following the announcement that the new governor of the Bank of England Mark Carney plans to keep interest rates low for some time yet.
For investors who want to play the UK recovery theme, it is important not to lose sight of the fact that the link between the UK stock market and the domestic economy is only partial, given the international earnings profile of companies listed on the London Stock Exchange.
Some two-thirds of FTSE 100 company revenues are earned outside of the UK, so for investors who want to achieve greater domestic exposure, it is necessary to fish further down the market cap spectrum.
So how can investors play the UK domestic recovery? Six ideas for investors identified by the research team here at Bestinvest are detailed below.
Mid-cap funds: AXA Framlington UK Mid Cap
In contrast to the international earnings make-up of the FTSE 100, the FTSE Mid 250 Index earns around half its revenues at home, so has more domestic characteristics.
This fund, managed by Chris St John, is a minnow at circa £17m, which we see as an advantage when focusing on a relatively narrow universe of stocks. At least 70 per cent of the fund invests in the FTSE Mid 250 but it can invest up to 15 per cent in FTSE 100 companies, with the balance in smaller companies, providing some additional flexibility.
Large holdings at the moment include the likes of equipment rental firm Ashtead group, property search engine Rightmove and building supplies firm Travis Perkins.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund has returned 61.6 per cent since its launch in March 2011, putting it ahead of both its benchmark and sector average.
Multi-cap investment trusts: Fidelity Special Values IT
With the top-performing Fidelity UK Smaller Companies open-ended fund having now soft closed, this trust offers an alternative way to access the stockpicking skills of rising star Alex Wright.
It has a brief to invest across the UK market cap spectrum and some 20 per cent is invested in small caps and 30 per cent in mid caps. The manager has a contrarian style, focused on identifying undervalued stocks with the potential to re-rate. It is important not to lose sight of fundamental value when parts of the market have started to look pricey.
Performance of trust, sector and index since Sep 2012
Source: FE Analytics
The trust is currently trading at a 4.7 per cent discount to NAV and has beaten its sector and benchmark since the manager took over from Sanjeev Shah late last year.
Mid and small cap: Old Mutual UK Smaller Companies
The Old Mutual UK Smaller Companies fund is typically 40 per cent invested in mid caps and 60 per cent in smaller companies and currently has a cyclical bias.
Some 35 per cent of the portfolio is invested in industrials and 17 per cent in consumer services. Key holdings include Ashtead Group, brewer Greene King, fund manager Jupiter and property groups Bellway, Galliford Try and Barratt Developments.
Performance of fund vs sector and index since Jan 2004
Source: FE Analytics
The fund has been managed by Daniel Nickols since launch in 2004. Since then, it has significantly beaten its sector and benchmark, with returns of 337.21 per cent.
Small caps with an income twist: Unicorn UK Income
This is managed by veteran small cap investor John McClure, who has 90 per cent invested in smaller caps with a focus on companies that generate a decent dividend yield. The remaining 10 per cent is in mid caps.
The portfolio is therefore very different from a typical income fund, with large holdings including cinema chain Cineworld, express delivery firm UK Mail Group and wealth manager Brewin Dolphin. For hard-pressed income seekers, this could make an attractive foil to a traditional equity income fund.
It is yielding 2.7 per cent and is number-one in its IMA UK Equity Income sector over three and five years, and second over one year.
Commercial property: Henderson UK Property
Commercial property has a close correlation to the health of the economy. As a result, funds in the sector have struggled in recent years, especially those with exposure to the UK high street: 2012 saw a record number of high street shops hit the buffers – Jessops and HMV, for example – leaving properties vacant rather than generating income.
A weak economy limits the scope for rent rises as well. A sustainable recovery would support property valuations and yields but one nagging concern is refinancing risk: property deals made at the height of the credit boom are not being refinanced on such generous terms, as banks toughen up.
We therefore think it makes sense to focus on property funds focused on high-quality locations. We like Henderson UK Property, which is currently yielding 4.3 per cent.
On a total return basis it has returned 34.38 per cent, falling short of its IMA Property sector average and benchmark. It has been less volatile, though.
Finally, while the good economic news should put a spring in the step of investors, it is clear that parts of the UK equity market have priced in a lot of this optimism.
However, across the globe, markets are likely to remain skittish as investors try to assess the extent of the slowdown in China and the potential impact on global growth, as well as timetable a potential tapering down of QE in the US.
Investors should therefore apply a common sense approach of phased investing or buying on any dips, rather than piling in blindly on the back of exuberant data.
Jason Hollands is managing director of business and communications at Bestinvest. The views expressed here are his own.