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Market suffers from political jitters

The UK equity market's previous equanimity regarding the outcome ofthe election has given way to nerves in the run-up to the election.


Wall Street’s decline after a US interest rate rise had little impact on the UK market. This was expected given that UK equities did not share in the great bull surge of their US counterparts. Any continued weakness in Wall Street should present a buying opportunity for the UK market.


The banking sector has performed strongly so far this year. Despite expectations of a post-election interest rate rise, the prospect of increased rates has already been priced into the sector. Consumer goods have shown a more consistent performance this year, especially pharmaceuticals. Given recent profit downgrades from the industrial sector, pharmaceutical stocks are seen to have defensive qualities as well as good growth prospects.


Labour has continued to encourage the market to believe that it would form a moderate government, with announcements that its spending plans would involve no increase in corporate taxation or PSBR. However, the market has become nervous with the announcement of the polling date and the early days of the election campaign have proved unsettling for share prices.


Global equity markets have finally faltered, with Wall Street suffering its biggest setback since 1994. Mr Greenspan provided the catalyst by raising interest rates by 0.25%. Given the momentum in the economy we expect a further 0.5% rise which will again set back bonds and equities.


Base rates have been left on hold since the end of October. This has been despite continued pleas from the Governor of the Bank of England for another 0.25% increase. However, markets are now anticipating a 0.25% increase following the 7 May monthly monetary meeting.


Current inflation news has been encouraging and the lagged effects of sterling appreciation should ensure that the Government’s inflation target is met. Sterling remains an important factor and, if it persists at current levels, inflation is unlikely to become a major concern in 1998.


Sterling has sustained the gains made since late last year. But the pace of the rise has been tempered slightly by expectations that interest rates will not have to be raised as aggressively as previously thought to bring about a slowdown in the economy. The continued strength of the pound remains a worry for corporate profits.

Information supplied by Scottish Amicable Investment Managers: 0141 303 0000.

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