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15 November 2004 Angelo Coppola

After a disappointing start to the week on nervousness ahead of a possible US interest rate rise, the market moved higher throughout the remainder of the week, says Quentin Smith from OMAM in the UK.

This was buoyed by positive corporate news and taking the US rate hike in its stride.

In its quarterly inflation report, the Bank of England cut its forecast for economic expansion next year and said that there are risks that both growth and inflation will undershoot its projections, suggesting it is unlikely to raise interest rates in the near term.

The BoE reiterated that it expects inflation to reach its 2% target after two years and projected a recovery in economic growth during 2006 as sterling weakness boosts exports.

The central bank stated that the overall risks to growth and inflation are on the downside, in contrast with the previous quarterly report in August that described the risks to inflation and growth as being ``broadly balanced.''

Since that report, higher borrowing costs have halted a five year housing boom, curbed manufacturing output and reined in consumer spending.

Meanwhile in the US, Federal Reserve policy makers raised the benchmark interest rate for a fourth time and restated a plan to carry out further increases at a measured pace.

The Fed Funds rate was raised to 2%, with the Federal Open Market Committee commenting on the improving labour market and the moderate economic growth rate, despite higher oil prices.

Over the week the FTSE 100 and All-Share indices both advanced 1.1%, with midcaps up 1.0% and smallcaps ahead 1.3%. Sector gainers included industrials, consumer cyclicals and technology, while utilities was the weakest area for a second successive week.

British Airways (+1.8% to 229p), Europe's second largest airline, reported a 26% rise in second quarter profit after cutting jobs and benefiting from increased demand for air travel.

The company has cut 13,082 jobs, more than a fifth of the workforce, since 2001 and has cut fares to counter competition from low cost carriers. BA raised its ticket surcharge to £10 from £6 last month as fuel prices soared and expects rising fuel costs, along with employee costs, to remain a challenge.

Telephone company Cable & Wireless (+10.2% to 119p) reported a profit for the first time in three years after cutting costs and exiting unprofitable businesses.

C&W is halfway through a three year plan to boost sales and profit at the UK business and fend off competition in the Caribbean and has cut jobs and exited the US and Japan. The company expects future growth to come from voice and data services run over internet networks.

BT Group (+3.6% to 199p), Britain's largest phone company, reported a 14% rise in fiscal second quarter profit as demand for high speed internet connections helped sales rise for the first time in six months.

Faced with a shrinking fixed line phone business and increasing UK competition, BT is turning to foreign acquisitions for growth. Last week the company announced plans to buy California's Infonet Services Corp for $965m to add a 180 country data network.

BT is also in talks to buy New York-based network provider Radianz.

Quick Polls

QUESTION

As National Treasury mulls a two-bucket retirement system, mandatory contributions and preservation, regulation 28 is being amended to allow up to 40% of retirement fund assets to be invested in SA-based infrastructure… Which of the following retirement fund ‘tweaks’ would you consider most beneficial to your clients?

ANSWER

Give fund members emergency access to retirement savings
Let fund members invest 40% in infrastructure
Let fund members invest 40% offshore
Mandatory preservation when resigning from a fund
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