UK STOCKS are likely to reach new highs this week as investors snap up shares not exposed to Asia's economic turmoil and which will benefit from domestic growth. Bonds, on the other hand, are expected to fall if reports strengthen the case for a rise in interest rates this quarter.

Equity investors will focus on retailers' Christmas sales figures. Tesco, Storehouse and Body Shop International will issue trading statements. Lonrho, the industrial holding company, will report full-year earnings.

"People are looking at the UK as a safe haven," said Mark Gardner, fund adviser at Julius Baer Investments. "Exposure to Asia is low. If you stick to the domestic stocks, such as financials, property and pharmaceuticals, you are picking up on reasonable growth in the UK."

The FT-SE 100 index rose 97.3 points (1.88 per cent) on Friday to 5263.1, near the 3 October closing high of 5330.8. The index rose 2.43 per cent over the week. The FT-SE Gas Distribution sub-index was up 8 per cent as investors bought domestic stocks.

This week reports on government borrowing, retail sales and broad money supply for December, and a provisional estimate of fourth quarter growth will be issued. "On balance, I think the numbers will be negative for gilts, as they'll reinforce the belief that a rate rise is still on the agenda," said Philip Shaw, chief economist at Investec. "I expect a slowdown in GDP, but not enough to dispel expectations that rates will rise next month."

Mr Shaw expects the retail sales report to support anecdotal evidence that spending over Christmas was stronger than retailers first thought.

On Friday the benchmark 7.25 per cent 10-year gilt fell and the yield rose to 6.07 per cent. The rally in Tokyo stocks helped "take the edge off bonds as the flight-to-quality argument fades," said David Brickman, economist at PaineWebber International. The yield rose 28 basis points last week as hopes that interest rates had peaked faded after wages grew faster than expected, raising inflation fears, and Bank of England Governor Eddie George said interest rates could rise soon without signs of economic slowdown.

Philip Laing, a fixed-income fund manager at Scottish Life in Edinburgh, said another rise was not certain. "If they do hike again, I think there would be a strong feeling that that would be it and we could see gilts rally."

Even so, some investors are concerned that another rate rise may slow growth too much. The Bank of England raised rates five times last year in an attempt to control inflation. The Bank of England's monetary policy committee next meets on 4 and 5 February.

Asia's turbulent markets could also mean stocks of British companies that make a lot of their profits in the region will suffer more losses. The FT-SE Engineering sub-index led the percentage decliners last week, falling 9 per cent. "There is still a lot of uncertainty regarding Asia," said Mr Gardner.

Copyright: IOS & Bloomberg

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