<START> UK small caps enjoy summer hot streak A rare spell of sunshine appears to have worked wonders in the UK economy this summer. After a disappointing recovery from the financial crisis, confidence is on the rise, economic growth is picking up and the UK stock market has enjoyed a winning streak. Unusually, however, the star performers have not been the customary index heavyweights - banks, miners and other companies geared towards global growth. Many of these international companies are heavily exposed to commodity prices or emerging markets, and have been hurt by concerns over China and EM instability. By contrast, many domestically focused groups, long shunned for their dependence on the fragile, post-crisis UK economy, have leapt ahead with a run of stronger official data and surveys that suggest the long-awaited rebound is, finally, happening. The FTSE 100 index has risen about 10 per cent this year and the All-Shares gauge has climbed over 12 per cent. However, the FTSE's SmallCap index has soared more than 21 per cent, to its highest level since June 2007. At least in the short term, the sun seems to have played a big role in supporting consumer spending, and sectors that depend on the animal spirits of shoppers. "There are now headwinds for big, global businesses and a small tailwind for UK companies," says Jim Stride, head of UK equities at Axa Investment Managers. Good weather conditions tend to support a wide range of industries. Activity in the construction sector climbed at its fastest pace in six years in August, as a government scheme to support home purchases has boosted the housing market. Consumer confidence has risen more in the past four months than at any time since 1982. As a result, the National Institute of Economic and Social Research estimates that the UK economy grew at the fastest rate in more than three years in the three months to the end of August. This would be the fastest rate of economic expansion since the summer of 2010, when the eurozone crisis began to rumble. As a result, analysts have begun to lift their outlooks for corporate earnings. After raising their forecast for UK economic growth by 1.4 percentage points to 2.1 per cent in 2014, Citi's strategists upgraded UK stocks to overweight last week. The more buoyant prospects for spending have lifted the FTSE General Retailers index to its highest level since May 2007. Companies such as electronics chain Dixons, which has added almost two-thirds to its market capitalisation this year, and clothes retailer Next, up 36 per cent, are leading the rally. Online grocer Ocado has soared. Housing, construction and building materials stocks have also been big winners in the UK's economic resurgence, while Lloyds Banking Group has markedly outperformed rivals. The rally has extended to companies that until recently looked like looming corporate failures. Thomas Cook, the travel company that nearly collapsed two years ago, has climbed over 250 per cent this year as it reduced debt, cut costs and enjoyed supportive bookings. Punch Taverns is still locked in debt restructuring talks with creditors, but has gained 62 per cent in 2013. In contrast, some of the worst performing UK-listed groups over the past year have been foreign commodity companies: Evraz, African Barrick, Kazakhmys and RusPetro. Bond investors have also had a poor 2013, with 10-year gilt yield - the pricing benchmark for UK corporate debt - rising from a low of 1.62 per cent earlier this year to more than 3 per cent last week. Nonetheless, some analysts and asset managers caution against excessive optimism. Although recent economic data have been encouraging, they have to be seen in context of the virtually absent recovery since the financial crisis. It may therefore be too soon to conclude that economic growth is fully back on track. We have been disappointed by growth for four years that even a weak recovery is to be welcomed. But we still have a big budget deficit that is being reduced, and that will continue to be a headwind," points out William Davies, head of global equities at Threadneedle. Analysts at Société Générale argue that while the UK market is still cheap in a historical context, other markets are more attractive - particularly France, Italy and Spain. They also note that while an economic recovery may boost housing stocks, the resulting higher bond yields may soon prove a bigger headwind for that sector. Mr Stride says: "There are many causes for optimism right now, but I would caution against euphoria. It looks promising, but these things can easily be blown off course.