LONDON MARKET: The worst is over, say the strategists

UK STOCKS may advance this week, led by Bodycote International, Northern Leisure and other companies whose earnings depend on economic growth, on optimism over recovery in Asia and the UK.

"If the economy does strengthen, and if Japan starts to show some signs of strength, then cyclical stocks are going to be more interesting," said Tony Hardy, manager at Church Commissioners.

The FT-SE 100 index rose 0.8 per cent to 6,163.2 on Friday but fell 1.8 per cent for the week as investors sold Reuters, Telewest and other stocks whose gains this year were considered higher than justified by their earnings outlooks. Reuters lost 8.5 per cent on the week while Telewest closed down 10 per cent. "We're getting to the end of the worst and looking forward to better growth in the year 2000," said Ken Forman, global strategist at Standard Life. "The UK market is offering good value and has a lot going for it."

Companies active in Asia may be among leading gainers. "Forecasts about the extent of the Asian recession were exaggerated," said Werner Lykowsky at Helaba Investment. "Asian stock markets have recovered and so will their banks."

Bonds may rise as reports on prices and economic growth bolster expectations that the Bank of England will lower interest rates again, perhaps as soon as next month.

A report on retail prices, due on Tuesday, is likely to show prices excluding mortgage payments probably declined to 2.5 per cent last month from 2.6 per cent a year ago. "The MPC targets inflation. If there's downside risk the Bank of England is more likely to cut than not," said Jonathan Cunliffe, at Lombard Odier Asset Management.

Bonds were little changed on Friday, with the benchmark yield at 4.43 per cent. Investors believe the UK is on track for 2.5 per cent or even lower inflation. "The trend is down," Mr Cunliffe said, forecasting underlying inflation could slip to 2 per cent by the end of 1999. "There's a fair chance [the bank will cut]", he said. A 4 per cent rise in the pound against the euro this year gives the central bank further cause to cut.

Crude oil was close to a five-month high on Friday, ahead of meetings between Persian Gulf oil producers this weekend and an Opec meeting on Tuesday, where output cuts are expected to be ratified. Oil producers last week agreed to cut at least 2 million barrels of daily output. Oil prices in the past three weeks have surged more than 20 per cent.