London Market: Asia could drag down profits

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The Independent Online
UK stocks are likely to be mixed this week on concern that Asia's slowdown will drag down profits at companies doing business in the region. Mobile- phone operator Orange is likely to rise, lifting other telephone companies, on strong earnings.

Recent earnings have shown that companies involved in Asia have had their profits sliced. Sliding currencies are likely to result in a flood of cheap imports, crippling British manufacturers, who will have to drop prices to compete.

"People will still be cautious about companies with Asian exposure and those with increased competition from Asia," said Tony Zucker, director of Friends Provident, citing steel, chemical and paper companies and engineers.

The benchmark FT-SE 100 index declined 2.7 per cent last week to 5680.4, sliding four days out of five.

Telephone companies were the biggest losers on the concern that their recent surge was not justified by earnings. The FT-SE telecommunications index dropped 5.3 per cent. Orange, the mobile phone company, is likely to limit losses this week as it is expected to say first-half loss narrowed. Its shares have almost tripled since the beginning of the year, mirroring the gains in the FT-SE telecommunications index, which has climbed 75 per cent.

Mr Zucker said he favours telephone companies as "penetration rates have exceeded all expectations and will continue to do so". He added: "There's huge growth still there."

Drug companies could be active this week as Nycomed Amersham, Smith & Nephew and Shire Pharmaceuticals Group release first-half earnings on Tuesday.

UK bonds are expected to be little changed as investors wait for the Bank of England's quarterly inflation report and May wage figures to help weigh chances that interest rates have peaked.

"Gilts will do little before the inflation report on Wednesday", said Philip Uglow, an economist at Sakura Bank. The central bank "is likely to say the economy is on track to meet its inflation target, but won't signal rates are at their peak'. Still, he added: "Gilt markets will be relatively satisfied by a modest slowing in wages growth."

The wages and inflation reports are likely to overshadow the producer price report and a retail sales survey. "Depending on what the inflation and wages report say, gilts may rally," Mr Uglow said.

Last week the yield on the benchmark government bond rose, pushing its yield down 2 basis points to 5.64 per cent.