As we approach the season of goodwill, investors who chose to put their faith in UK equities at the start of the year will be feeling particularly festive, having enjoyed a near 20% total return.

More adventurous souls who looked to the UK small cap sectors will have done even better with a return of 31%, while those who climbed aboard the emerging market story will be nursing more scrooge-like returns of 1.9%.

Sentiment towards the UK economy has changed remarkably since the start of the year, shifting from pillorying the chancellor's austerity strategy for leading us into a potential triple dip recession, to - just a few months later bemoaning the perils of an imminent house price boom.

The UK though is a highly international stock market over which the fortune of the domestic economy has only a modest influence.

We estimate just 30% of its revenues actually come from the UK.

One of the reasons small cap companies have done better than average is a greater exposure to a UK economy that is expected to be one of the fastest growing in the developed world, albeit one that is forecast to expand at just over 2% in 2014.

However, despite the better news on the domestic economy, aggregate earnings per share for the UK market have barely moved at all over the past two years.

What has really driven stocks upwards has been the paucity of opportunities elsewhere and the fear of missing out. With all the economic turbulence in recent times many investors have sat on the sidelines, but with equity markets up over 100% from the nadir in March 2009, and with yields on bonds and cash so paltry, the pressure to invest has mounted.

The price investors are prepared to pay to own equities, measured as a multiple of earnings, has simply increased.

Robust business models, strong balance sheets, high quality corporate governance and talented executive teams, coupled with hereto acceptable valuations, are the factors that have allowed firms to deliver excellent returns to us since the trough in markets in 2009.

While investors may be finally warming up to UK equities, and the domestic economy looks a little rosier, the earnings outlook for UK companies remains a challenging one at present.

Signs of an improvement in domestic demand are being countered by a slowdown in growth in Asia and Latin America and by currency headwinds from the strength of sterling. Valuations are increasingly full, especially for the kind of high quality businesses in which we like to invest.

So while we are optimistic about the long-term prospects for the companies we invest in, in the near term we recognise that valuations are more demanding and the operating environment for our businesses remains a tough one.

Investors not prepared to share our long-term time horizon may find themselves with better value opportunities in the new year sales than in the pre-Christmas market.

l Ben Ritchie is senior investment manager at Dunedin Income Growth Investment Trust