Shares revival set to be tested by rate decision

THE strength of a revival in Britain’s leading shares will be tested next week by the release of key interest rate decisions and a strategic review by Cable & Wireless, the stock that has spearheaded this year’s rally.

Telecoms group C&W is this year's best-performing blue chip stock with a 120% rally. It is due to deliver a strategic review alongside full-year results on Wednesday, and many investors expect to hear news on the sale or closure of its problem businesses to justify the leap in its share price.

Results from health and beauty retailer Boots and airports operator BAA will also come under scrutiny as Britain's FTSE 100 share index attempts to hold above the pivotal 4,000-point level. The index has failed to hold above 4,000 on two previous rises above that pivotal level this month.

"There's definitely good value in the market in the medium term, but in the short term we've had a very good rally, and I would have thought we're in the later stages of that rally," said Alex Lyle, head of managed funds at Threadneedle Asset Management.

David Harbage, fund manager at Barclays Private Client Investments, said a pick-up in earnings and spending was needed to back up the more confident mood.

"We want to see corporate profitability pick up and greater confidence in boardrooms in terms of capex, moving beyond maintenance projects onto something more worthwhile," he said.

The reaction to interest rate decisions in Britain and Europe on Thursday will be key to the market's broad direction, as data continue to provide mixed signals on the global economy. Most economists expect British rates to be left on hold, but there is an outside chance of a 25-point cut. The European Central Bank is expected to cut rates by 25 or 50 basis points.

Cable & Wireless shares this week leapt to over 100p to their best level since November, lifting the company's market value to stg£2.5 billion.

Investors have been heartened by its new management led by chairman Richard Lapthorne and chief executive Francesco Caio. But industry conditions remain tough and speculation has mounted that C&W will sell or shut its US business, although this could leave the shares vulnerable to a setback.

"We have mounting concerns that the recent rally leaves the current share price discounting a lot of good news. In short, there is capacity for the announcement to disappoint," said Mark James, a telecoms analyst at Nomura.

Elsewhere, Boots reports its full-year results on Thursday, two days after figures from BAA, which is likely to have been cushioned from the slump in travel by a rise in budget airline travel. Traffic figures from British Airways will provide more clues on whether the travel industry is through its worst.

Meanwhile, takeover speculation continues around water utilities. Results from Kelda, AWG and South Staffs may offer clues on more deals in the pipeline.