A strong recovery in Asian markets sent London up sharply yesterday. The FTSE 100 index jumped 3 per cent minutes after the start of trading following a surge of buying in the futures market.

It drifted back during the morning but never fell to earth. And a strong early showing by the Dow Jones Industrial Average, spurred by industrial production data that reinforced the benign inflationary climate, helped Footsie climb back towards its initial peak and close 125.2 higher at 4,867.0.

The impetus for recovery came from Hong Kong and Japan. The Nikkei was driven almost 8 per cent higher by hope that authorities were ready to take action to help the ailing financial sector following the public bailout of Hokkaido Takushoku Bank depositors. However, stocks exposed to the Pacific Rim - HSBC, Standard Chartered and Cable & Wireless - did not lead the market rise.

Instead, there was a broadbased fillip for international traders - albeit on slim volume - with extra encouragement provided by British Steel. Figures from the company, which has been hit hard by the strength of sterling, were a relief even though rumours of restructuring were not confirmed.

By the end of the day, Footsie may have been nearly 9 per cent below its early October peak but it was well above the end of year forecasts that strategists predicted in January.

Nevertheless, it was too low for Dresdner Kleinwort Benson, which published research suggesting that concentration on traditional valuation methods has left fund managers unable to unlock the value in UK equities.

"Certain sectors' ratings (relative to their forecast growth) seem superficially extreme," says the broker. "We believe that not only are they justified on grounds of earnings quality but we expect these quality considerations to become even more important."

The broker has looked very closely at UK institutional weightings compared to the holdings of US and European funds.

For example, data supplied by Citywatch shows US investors are massively overweight in pharmaceuticals stocks, which have outperformed the FTSE All Share index by almost 10 per cent since the start of 1996. However, UK funds are underweight in pharmaceuticals while they have become increasingly heavily weighted in underperformers such as engineers and paper and packaging.

Dresdner believes the market is fairly valued, bordering on cheap, and has held its end of year target at 5,200.

While Footsie saw the most dramatic gains, the FTSE 250 lifted 39.3 to 4,625.8.