Rate hike won't stop party

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European investors are likely to shrug off a widely expected rise in US interest rates next week, when the Federal Reserve's policymakers meet, and drive share prices higher.

Despite three recent warnings from Alan Greenspan, chairman of the Federal Reserve, that US stocks may be too expensive, fund managers believe shares will get a boost if rates rise by a quarter of a point to 5.5 per cent.

They believe higher rates will renew faith in the Fed's commitment to clamp down on inflation and restart the stalled six-year rally on Wall Street, pulling Europe higher still.

Even a larger-than-expected half percentage-point hike, they say, will ultimately be greeted by the market as positive. Any selloff that initially follows a rate increase is an opportunity to buy.

"Greenspan is always trying to stay ahead of the game," says Kathleen Dewandeleer, fund manager at Matheson Investment Management. "Even if the rise is a bit bigger than expected, markets may take it as a sign that he's still carefully monitoring things, and on we will go."

European markets fell last week on the prospect of a rate increase. In the UK, Thursday's sell-off was almost as dramatic as the one seen last December, when Mr Greenspan rattled global markets with his comments of "irrational exuberance" among investors.

But Ms Dewandeleer says that canny investors have been preparing for a rate increase for months, adjusting portfolios to a less friendly interest- rate scene.

"You've had a declining interest-rate environment in Europe until now, and you played the banks and the utilities. That is not the case anymore. Now you want the growth and restructuring stories."

"It's a case of ducking and diving, bobbing and weaving," says Simon Smith, at stockbroker Albert E Sharp. "There'll be a rise in the US, that's a given. The UK, more than any other market, is jittery in the run-up to the general election so a smart investor is going company by company. Your gains will depend precisely on where your exposure is."