Phone shares rise on merger optimism

LONDON MARKET

THE UK market may rise this week, led by phone shares as Vodafone AirTouch's bid for Germany's Mannesmann fuels optimism for more pan-Europe mergers in 2000.

"Vodafone's bid for Mannesmann is critical to how investors view European markets,'' said Keith Skeoch, the chief investment officer of Standard Life Investments, which manages pounds 70bn in stocks and bonds.

Manufacturing and engineering, including Invensys and Cookson, may gain ahead of a report that is likely to show UK economic growth is accelerating.

"The market has been slow to pick up on the rebound in growth,'' said Michel Fryszman, the head of Equity Fund Management at Capucines Gestion in Paris. "The rotation to cyclicals will continue.''

That growth has been predictably bad for bonds. Gilts, coming off their worst week since June, may fall further this week amid concern that rising wages and falling unemployment will persuade the Bank of England to raise interest rates soon.

Reports last week showed the jobless rate at a 19-year low and quicker earnings growth. The BoE raised the repurchase rate 25 basis points in September and the same again last month, and may lift it again at its 13 January meeting, analysts said.

Investors "have to be more bearish'' on gilts, said Stuart Thomson, a strategist at Sutherlands Stockbrokers. He said the 10-year bond yield could rise to 5.80 per cent in the coming months, from 5.30 now.

Shares will be helped when Vodafone AirTouch sets the clock ticking on its hostile $148bn bid for Mannesmann. A formal offer is expected late in the week.

Energis, Colt Telecom and Kingston Communications may gain, as these fast-growing outfits are considered acquisition targets for bigger telecom rivals in Europe.

ICI, the UK's biggest chemicals firm, engineers TI Group and mines group Rio Tinto will probably advance on expectations UK economic growth will boost earnings.

The Office for National Statistics is due to release its final revision of third-quarter GDP on Wednesday. Most economists expect GDP to be up 0.9 per cent, against 0.6 per cent in the second quarter.