Central bank moves to boost U.S. and UK stocks vs Europe

By Simon Falush - Analysis

LONDON (Reuters) - Aggressive monetary policy action from the Bank of England and the U.S. Federal Reserve will see U.S. and UK equities outperforming Europe as currency movements and easier lending conditions boost demand.

The surprise announcement of an injection of $1 trillion into the U.S. economy by the Federal Reserve last week lifted stocks globally and sent the dollar tumbling.

Indeed the greenback fell over 5 percent against the euro last week, the steepest decline since 1985, and fell further on Monday, making U.S. exports more competitive and denting the earnings profile of European companies.

"A 5 percent fall in the U.S. dollar will lead to a 1.5 percent drop in (European company) earnings; it is a drag on European earnings, definitely ... Britain and the U.S. would be net winners," said Exane BNP Paribas strategist Lars Kreckel.

"German auto makers, and (European) military goods companies, luxury goods and semiconductor (companies) are the obvious losers," Kreckel added.

Quantitative easing has also kept the pound mired near an all-time low against the euro and close to parity, helping British exporters, a rare bit of good news for an economy battered by the plight of its banks.

It will be cyclical stocks, commodity stocks and those with exposure to overseas markets that are set to gain most from quantitative easing, as improving demand sees those stocks hit hardest in the downturn.

"The cyclical stocks will outperform the more expensive defensive sectors," said Jonathan Ashworth, macro strategist at Barclays Wealth.

"As sentiment begins to pick up on the growth outlook, that will boost commodity prices, which will be good for the commodity-orientated stocks and sectors."

The Bank of England's quantitative easing, coupled with a base rate slashed to 0.5 percent, is set to dramatically lower the cost of borrowing for UK companies, enabling them to bounce back relatively quickly from a deep recession.

European companies, by contrast, are stuck with a strong currency and a central bank that shows no signs of emulating the Anglo-Saxon economies by wading in and buying up government or corporate debt.

"The question is what does the ECB do? It doesn't have the mechanism to buy those bonds," said Philip Lawlor, chief portfolio strategist at Nomura.

Analysts say Britain's ability to jump in will make life easier for its companies relative to continental counterparts.

"Intuitively, it's the right thing to be doing at this stage in the cycle," Lawlor said. "The overall objective is to lower the cost of capital to corporates and banks. It clearly is the right thing to be doing."

YIELDS FALLING