Index tops 3,000 in recovery euphoria: Profits outlook and lure of equities in a climate of falling interest rates push share prices to a record

The FT-SE 100 Index of Britain's leading companies finally breached the 3,000 barrier for the first time yesterday , after almost a week of flirtation. But the city believes that the recent strong run could be ending, and few analysts are increasing their forecasts for the index at the year-ebnd.

The index closed up 34.5 points at 3,006.1, its largest daily rise since May. That leaves it almost double the lowest level reached in the wake of the stock market crash in 1987, when it touched 1,565. Share prices also closed at record levels on Wall Street and in Paris.

The FT-SE 250 index, which measures the performance of the next 250 companies, also reached a new high, closing up 23.8 points at 3,430.6.

The stock market has been climbing steadily since the first cracks in the exchange rate mechanism last month. Since 22 July, when the run started, the FT-SE 100 has risen from 2,820.1, an increase of 6.6 per cent. That is only just behind the 8 per cent increase achieved in the two days after Britain left the ERM last September.

The rise in share prices reflects the market's belief that interest rates are heading down across Europe and that Britain is poised for recovery, which should be reflected in strong profits growth from companies.

Dealers said yesterday's surge was largely due to interest from overseas investors, and to the lead given by futures buyers. Frenzied activity on the London International Financial Futures Exchange sparked the need for traders to buy shares to cover future commitments and helped the FT-SE 100 to push through the 3,000 barrier.

British institutions, which already have about 55 per cent of their assets in UK shares, have not been large buyers - although they are unconcerned by the market's rise.

Dick Barfield, head of investments at Standard Life, said he still believed there was room for the market to improve and pointed out that, although share prices looked expensive, compared with alternatives like bonds or bank and building society deposits, they offered an attractive return.

That is also being recognised by private investors, who have seen interest rates fall from 10 per cent to 6 per cent since Britain left the ERM. Net sales of unit trusts in the three months to June were pounds 2.5bn, more than four times those in the previous year.

Yesterday's increase means the FT- SE 100 has risen by more than a quarter since the ERM exit paved the way for lower interest rates. But most City analysts still expect it to end the year at between its current level and 3,200 - although Nomura, generally the most optimistic, thinks it could reach 3,500.

Gilt-edged government securities also raced ahead, boosted by the Bank of England's upbeat inflation report and by hopes of lower interest rates. The Bank exploited the mood by offering an extra pounds 1.2bn in gilts for dealing from today.

Gilts prices and share prices often move in line, with long-dated gilts offering roughly twice the yield of equities. If their prices get too far out of line, investors pursue the more attractive return by reallocating their portfolios, thus helping to restore the traditional relationship.

The Bank's decision on Tuesday to reduce its forecast for underlying inflation over the next two years saw long- dated gilts perform particularly strongly. The 83 4 per cent stock due 2017 closed pounds 115 32 higher at pounds 1155 32 . This saw the yield fall on the day from 7.5 per cent to 7.38 per cent, the lowest for 25 years. A week ago the stock was yielding 7.76 per cent, and a month ago 8.1 per cent.

Ian Shepherdson, of Midland Global Markets, said the Government's promise to raise taxes by pounds 10bn in the next two years was ensuring that growing optimism about inflation outweighed the prospect of large sales of government debt. Optimism on inflation also fuelled hopes of another cut in interest rates.

Most European bond markets rose sharply on interest rate hopes. Belgian commercial banks raised their lending rates, exerting further pressure for official rate cuts.

The Bank of France eased its overnight lending rate by half a point to 9.25 per cent, although this has no impact on the rates at which French consumers and businesses can borrow. Attention will now be fixed on today's French inflation figures. The franc closed at Fr3.5055 against the mark, up from Tuesday's Fr3.5204.

Hopes of a cut in UK interest rates were boosted at the end of last month by the Confederation of British Industry's quarterly survey of manufacturers, which showed worries about exports as the pound strengthened and European economies weakened.

A regional analysis of the figures, released yesterday, reinforced rate-cut hopes. It recorded that rising demand for factory goods is more widely spread across the country than at any time since the recession started. But Northern Ireland, the North, the North-west and Wales reported that orders continued to fall.

----------------------------------------------------------------- FT-SE PREDICTIONS: CAUTION PREVAILS ----------------------------------------------------------------- 1.1.93 Now County 3,000 3,000 Capel 3,200 3,200 Nomura 3,500 3,500 UBS 2,900 3,150 BZW 3,000 3,100 Goldman 3,100 3,150 Sachs Morgan 3,100 3,100 Stanley First column shows the houses' January predictions for Footsie at the end of the year, second column shows their latest predictions. -----------------------------------------------------------------

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