Rate rise could help UK stocks

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The election of the first Labour government since 1979, with the party's largest-ever majority, is receiving a mixed response in the City. Investors are focusing particularly on former state-owned companies like United Utilities and Railtrack.

"The size of the victory was staggering, so this could be a 10-year reign for Labour. One has to be a little apprehensive," said Simon Smith of stockbrokers Albert E Sharp. Labour's heritage is of policies that required high taxes and led to accelerating inflation. Under Tony Blair, however, the party says it is committed to keeping a lid on public spending.

The new Chancellor of the Exchequer, Gordon Brown, will probably move quickly to raise interest rates to cool the booming economy and establish his anti-inflationary credentials. Rates could rise as early as next week. "An interest-rate rise could be perceived as helpful to stocks. You're choking off potential inflation," said Alex Crooke, fund manager for Henderson Investment Management.

Bank stocks performed well last week and could do so again next week; bonds are rising around the world as fears of a second US interest-rate rise later this month are receding.

But utilities could slip further amid persistent concern about how much they will have to pay under Labour's windfall tax.

United Utilities, for instance, fell 3.4 per cent last week on such fears. Railtrack also slipped 3.5 per cent on concerns that shareholders will see lower returns and a tougher regulatory regime, even though Labour has ruled out returning the rail system to state ownership.

"The market has factored in a fairly large windfall tax and I think utilities are still offering a lot of value," said Mr Crooke. Even so, utilities are likely to mark time until Labour reveals details of the new tax.

Investors will also focus on corporate earnings figures to be released after the Bank Holiday Monday. British Petroleum, the second-biggest UK company by market capitalisation, will report first-quarter results.

Food retailer J Sainsbury and brewer Whitbread will announce full-year earnings, and BSkyB reports third-quarter earnings.

British markets are also likely to take their cue from the bond and stock markets in the US. On Friday, stock markets on both sides of the Atlantic rose after April's statistics on US jobs suggested that strong growth is not stoking inflation.



US stocks surged last week, enjoying their biggest three-day rise since 1991, while the Nasdaq Index had its best one-week gain in more than nine years. Intel and Microsoft led the gains on renewed enthusiasm for computer and networking stocks. The Dow Jones index rose 4.9 per cent to burst through the 7000 level again, closing at 7071 on Friday. The market has risen almost 10 per cent since its recent low on 11 April. Stocks were boosted on Friday after the April jobs report suggested that wage increases are under control and a second interest-rate rise may not be necessary.

In London, the FTSE-100 index rose 2 per cent on the week to close at a record 4455.6. The general election dominated sentiment, making trading volatile. By the close of Friday investors decided they approved of the new government and the scale of the Labour victory. They are more confident that the new administration will not introduce policies that could hurt corporate profits or the economy.

In Germany, shares soared to a record high at the close of the week after the US employment report. This will help strengthen the dollar and thus boost the competitiveness of German exporters. Automotive stocks such as BMW and Daimler were the biggest gainers. The DAX index rose 2.5 per cent on the week

In France, the CAC index rose 119 points, or 4.7 per cent, to 2655.31 as investors set aside political concerns and fears about interest-rate rises and focused on takeover activity. Drug shares are particular targets, and Sanofi and Synthelabo were among the most active stocks. Polls showing that the government coalition should win the coming elections reassured investors who fear that economic reforms, including state asset sales, may be aborted if the socialists win. Copyright: IOS & Bloomberg