Media stocks in vogue as City applauds US merger

Media stocks led the London market sharply higher yesterday as investors responded to news from the US of the planned merger between Internet giant America Online and media conglomerate Time Warner.

The top four performers in the FTSE 100 index were all media stocks, as investors speculated about further deals within the industry. And the pattern of last week was reversed as the telecoms and technology companies made a comeback, while the defensive stocks, such as brewers and food producers, were sold off. There was even a bout of domestic bid speculation on talk that Glaxo Wellcome and SmithKline Beecham could revive their merger negotiations.

The international background was highly positive, with European markets rebounding and Wall Street pushing further into record territory in early trading. The net effect was to send shares higher across the board, with the FTSE 100 index gaining 102.9 to close at 6,607.7. At one point, the index was 129.4 higher at 6,634.2. The FTSE 250 and SmallCap indices performed so well that they each were able to set new closing records. The former jumped 59.9 to 6,544.3 and the latter 45.9 to 3,140.9. Last week's sell-off was much more noticeable among the blue chips than the smaller and medium-sized stocks.

Investors were able to put to one side the widespread expectation that the Bank of England will announce an interest rate rise on Thursday after the meeting of its monetary policy committee.

Most analysts are looking for a quarter-point increase in interest rates. The cost of US borrowing is also expected to rise when the Federal Reserve open market committee meets at the start of February.

"Two questions dominate the outlook for UK equities in 2000" according to Mr Ian Scott, European strategist at Lehman Bothers. "First, is the apparent strength of the economy and earnings already reflected in stock prices? Second, will the Bank of England respond aggressively to increasing signs of economic strength, despite the subdued readings for retail price inflation?"

Mr Scott believes the answer to both questions is yes but still thinks the FTSE 100 index can advance to 7,200 by the end of the year. He believes that "there are signs of a genuine improvement in underlying economic performance" and adds that British equities look fairly valued, relative to the current yield on gilts.

Turnover was very healthy for a Monday and back to the high levels that marked trading in the last two months of 1999. Volume by the 6 p.m. count was 1.64 billion shares, with Vodafone the busiest single stock. Substantial dealing in penny shares indicated that retail investors were very active.