View from City Road: Investors heed urge to go west

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The Independent Online
THE LONDON stock market's truculent reaction to a 0.25-point German interest rate cut reflects worries about the elbow room for immediate further cuts at home and evidence that more rights issues are on the way.

But the stock market is also worried that the Bundesbank has given no sign that it is prepared to cut interest rates significantly or quickly enough to head off what fund managers fear may be an outright recession throughout Europe.

A depressed European economy will do little either for UK exports across the Channel or for the underlying profits of companies with sizeable operations on the Continent.

This stands in stark contrast to the position of companies dealing with or inside the United States, where the combination of dollar strength and incipient economic recovery is a potent source of profit improvement both in local currency and sterling terms.

The differing outlooks for Europe and the US have already been picked up by the London stock market, even allowing for the fact that since mid-September the pound has fallen much further against the dollar - by 25 per cent - than it has against the German mark or French franc, where the decline has been more like 15 per cent.

The comparison is clearest if shares in the same stock market sectors but with significant profit exposures to Europe on the one hand and North America on the other are lined up against each other.

Wolseley, the building supplies distributor with large North American interests, has not only outperformed the stock market by 45 per cent since Black Wednesday: it has outperformed the materials group Redland, with its high-profile German and French interests, by more than 30 per cent.

Barratt Developments has outperformed Taylor Woodrow by 70 per cent and BBA Group has beaten Laird Group, which makes significant component deliveries into the German and Spanish car markets, by 40 per cent.

Carlton Communications and Dawson International, the textile group, also had advantages, if slighter, over Reuters Holdings and Coats Viyella respectively. Wellcome managed to fare somewhat better than SmithKline Beecham in the recent healthcare sell-offs even if that meant underperforming the market by 20 per cent.

The message from yesterday is sell European exposure and buy American.

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