MARKETS & DATA - Tigers fall from grace in US

UK stockmarket

The FTSE-100 has enjoyed a strong bull run this year with the leading companies within the index benefiting most from institutional investment.

However, valuations now look expensive and we believe that there are better opportunities in medium and small cap stocks.

Interest rates

The path to Emu continues to dominate European bonds with yields in most markets converging towards German levels. Yields on UK gilts are the highest in Europe, but we also expect them to converge gradually as the government edges us closer to joining the single currency. There is growing confidence that Emu will meet timescales with a wide membership and most markets have already priced this into their valuations.

Overseas equities

With falls in Asian stockmarkets, US fund flows are being reinvested in domestic markets, especially in growth stocks which tend to be medium-sized companies. The Japanese market needs a stimulus to move forward but with the government sticking to its fiscal policy we see no immediate short-term solutions.

Exchange rates

In the wake of German interest rate rises, the follow-up rate increases by its DM bloc neighbours came as no surprise and was a clear indication that central banks will follow a common monetary policy in the run-up to Emu. In Japan, the government has made it clear that it would put the brake on further yen depreciation if the dollar rose above Y123.

Expressions of opinion contained within this document are subject to change. Past performance is not necessarily a guide to the future and the value of investments can fall as well as rise. Britannia Investment Managers Limited is regulated in the conduct of investment business by IMRO.