"Lower interest rates are going to boost spending by consumers," said Simon Smith, manager at Capel Cure Sharp. "They'll also help stocks, which pay higher dividend yields."
The FT-SE 100 index rose 0.1 per cent on the week to 6,428.0. Among the biggest gains were restaurants, pubs and breweries. The breweries sub- index rose 5.7 per cent and could rise further on hopes consumer spending will improve. Scottish & Newcastle advanced 14.5 per cent and Greenalls gained 10.2 per cent.
Brokers are recommending that investors buy stocks that depend on the domestic economy and stand to benefit from falling rates. "UK interest rate cuts are quickly translated into spending," said David Owen, economist at Dresdner Kleinwort Benson.
He expects rates to fall to 3.5 per cent by the end of 2000 from 5.25 per cent now. To benefit from such as drop, Dresdner recommended a portfolio of 10 companies: Airtours, Bass, Barratt Development, Capital Radio, Halifax, Kingfisher, Ladbroke Group, Lloyds, Provident Financial, Whitbread, Wilson Bowden and Woolwich.
The prospect of falling interest rates will also make stocks relatively more attractive than bonds.
"This is a bond-driven market," Mr Smith said. "If you can now only get a 5 per cent yield on a gilt, then why not buy a smaller company that is yielding 5 per cent and that could increase in value over the next year." The yield on the UK's benchmark 10 year-bond, or gilt, was 4.52 per cent on Friday.
Gilts may fall as new signs of an economic recovery lower expectations for an interest rate cut next month.
A survey of manufacturers is likely to show that while the industry as a whole is still in recession, the rate of contraction has slowed. Manufacturers were probably more optimistic about future prospects in the first quarter than a year ago.
Though the recession isn't over, "There could be a little bounce," said Robin Aspinall, European economist at National Australia Bank. "Still, for all the sanguine talk about the economy, manufacturers are still in deep distress which has been intensified by sterling's strength."