UK misses out on the bull run

What's the matter with Britain's market? asks Matthew Lynn on www.Bloomberg.com. British growth is leaving "most of Europe in the shade"; only Spain is expanding faster, while Germany and France are slowly recovering from a downturn. Yet the FTSE 100 is "missing out" on Europe's bull run. The benchmark index has gained just 10% in 2003, while its German and French counterparts are up by a respective 32% and 12%. Switzerland's SMI Index has gained 15% and Spain's IBEX-35 22%. And this year's underperformance isn't a one-off. 2003 will be the fifth year in seven in which French and German stocks have done better, and Commerzbank's European equity strategist Rolf Elgeti expects more of the same next year.

One problem is that the FTSE is heavily weighted with multinational companies exposed to the falling dollar. HSBC, BP, Vodafone and GlaxoSmithKline make up a third of the index. More significantly, however, the Government has both reduced tax breaks for private investors and increased levies on dividends paid to pension funds, hence lowering the funds eventually available for investment. Businesses have also been hit by "a mounting tide of taxation and red tape". Furthermore, the economy is being kept afloat almost entirely by consumer borrowing and Government expenditure, which looks unsustainable given further likely rises in interest rates. All this deters investors - a worry, given Britain's heavy reliance on foreign capital to finance its large trade and budget deficits, and our need for a strong market to plug corporate pension-fund deficits.

Meanwhile, European markets appear to be shrugging off fears that the strong euro will hamper export competitiveness, says The Wall Street Journal. Shares kept climbing last week, thanks to encouraging economic data, including the strongest eurozone purchasing managers index reading in three years and a forecast-topping jump in German industrial production. It seems the sharp rise in global trade accompanying the worldwide recovery is softening the impact of the downward pressure on earnings caused by the weakening dollar, says Daniel Eckert in Die Welt. Indeed, according to Bankgesellschaft Berlin, which has examined German stocks' performance during the dollar bear markets of the past 25 years, the market tends to do well when the greenback is weak. It climbed for most of the 1985-88 dollar depreciation, for instance, and automobile stocks were among the Dax's top performers between 1985 and 1987, despite being highly exposed to the US.

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But it's far too soon to relax, says The Business. HSBC claims the dollar must fall another 20% in trade-weighted terms "to begin to reduce" America's current-account deficit. That could require another 36% rise in the euro to $1.65 - a level that "would send the eurozone straight into recession by pricing their exporters out of the market".