View from City Road: Wellcome could warm things up

THERE was good and bad news for investors yesterday. The bad news was the German decision to raise the discount rate. The good was the outline arrangements for reinvesting the proceeds of the Wellcome share sale.

Earlier in the year, large investors were hoping for a cut in interest rates by now. Instead they got a hike. Fortunately they had been warned last week, so few were badly caught out by the news.

While the German decision has little direct effect on Britain, it underscores the bearish mood among stock market investors. With no evidence of recovery before the holiday season, they now have to wait until the autumn for encouragement from the economy. And by then the talk could be of American malaise pending the outcome of the presidential election. At least it will now be a two-way fight, following yesterday's withdrawal of Ross Perot.

Investors are nevertheless searching hard for reasons to buy shares. Most fund managers are equity investors by inclination and have only recently become converted to the attractions of bonds, and then only in respect of a limited portion of their portfolios. They are also acutely aware of how fast the stock market could turn.

What could make it gain ground? It is just possible that Wellcome could be the turning point. At first sight this looks implausible, given the recent performance of new issues. But Wellcome is different because the proceeds of about pounds 3bn from its share sale will be reinvested, most of it in the London stock market.

Up to pounds 1bn will be invested in an indexed UK equity fund. The rest will probably go initially into cash and gilts. But it will be fed into shares gradually, so that 80 per cent of the total will eventually be invested in equities. Given that 90 per cent of Wellcome Trust's outgoings are sterling-denominated, almost all the portfolio is likely to be invested in British companies.

It is almost certain that overseas investors will take up a large chunk of the Wellcome shares, following roadshows round the world. This means that the net effect of the offer over time will be to draw money into London from overseas. This is good news for the London stock market, notwithstanding uncertainties over the timing of the reinvestment.

No one, however, should get carried away. Take your cue from the Prudential's reassessment - it expects the market to end the year only 7 per cent higher at 2,650.