Share index soars on tide of optimism

THE STOCK MARKET surged to record levels yesterday as investors hoped for a cut in interest rates and leading companies reported further evidence of a recovery in the economy.

The FT-SE 100 index, which measures the shares of the UK's leading companies, rose 34.5 points to 3,006.1 - the first time it has been above 3,000. Prices have risen more than 6.5 per cent in the past 14 days as investors became convinced that Britain is on the way to recovery. On Wall Street shares also climbed to a record, up 10.62 to 3,583.35, and in Paris prices gained 1.29 per cent to a high of 2,167.39.

Yesterday's London rise added pounds 6.85bn to share prices, increasing the market's value to pounds 666bn. Dealers said it was partly due to interest from foreign buyers, attracted by Britain's low inflation and recovery prospects. But it was also led by buying of futures contracts - where investors purchase shares for delivery later in the belief that prices will rise in the intervening period.

The euphoria was also sparked by the collapse of the exchange rate mechanism, which is expected to lead to lower interest rates across Europe, encouraging the Chancellor to make further cuts here. That conviction was encouraged by a cut in French interest rates yesterday, the second in a week.

The rise came as the Confederation of British Industry reported that an analysis of its latest survey showed increased business activity was more evenly spread across Britain than at any time since the recession started.

The surge in shares has also heralded the return of private investors who are suffering a drop in interest rates at bank and building societies. Attracted by better returns on shares, they invested pounds 2.5bn in unit trusts in the quarter to June, more than four times the previous year. But pounds 56m was withdrawn from building societies that month.

The FT-SE 100 index has risen steeply since Britain left the exchange rate mechanism last September, a move which paved the way for interest rate cuts and allowed the Government to focus on recovery. But investors have not benefited equally from the rise.

Building and property companies' shares, expected to be among the first to gain from a recovery, have more than doubled in value. But those in drug companies have fallen by 21 per cent as investors worried about US health reforms and price controls across Europe.

Investors have also favoured smaller companies, which are more dependent on the British economy, than international groups and those heavily exposed to recession in Europe. The FT-SE 250 index, which measures the tier below the 100 largest companies, rose 34.5 points yesterday to 3,006.1. It has risen more than 58 per cent since September.