Even if the US market needs a breathing space, a downward slide may not be imminent

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The Independent Online
Corporate finance departments have been kept busy over the past year or so. Much of the activity was put down to a "beat the election" buying spree from corporate predators. The idea was to get in early and so be ahead of what was expected to be a tougher regulatory regime under a Labour Government. So far so good, but what happens as soon as the election is out of the way? A mega-merger catches the market unawares.

I imagine there is merit in washing down your Burger King meal with pints of the black stuff, but it is difficult to see the deal going through. Aside from the fact that it will be a great test for the new Government's competition policy, already many of Grand Metropolitan and Guinness's rivals in the drinks trade have pointed to the anti-trust provisions in the US and have indicated that they will make every effort to stop the merger succeeding.

That says to me it must be a good idea for the shareholders of the two companies. The market thought so too, marking the shares of both companies up sharply. Now we have the waiting.

It is very telling that the new company is to be called GMG Brands, assuming it succeeds in crossing the many hurdles that will be in its path. Brands and brand management look like being the business opportunity of the 1990s.

Banks have been working hard to develop their brands. Witness the way that the Midland Griffin has been replaced by the HSBC Hexagon. HSBC probably thinks its business skills and branding capabilities are capable of further exploitation. Rumours abounded during the week that it was about to pounce upon Abbey National.

It is just as well we have all this takeover activity to buoy market sentiment as I have been listening to the wise Professor Tim Congdon telling an audience in Ipswich that the bull market has come to an end. Speaking at a seminar organised by my new colleagues in my home county (hurrah! an early night), the ex-adviser to the Chancellor pointed to inflated valuation levels in the US leading inevitably to a retrenchment, with all the knock-on effect that might have on other world markets.

I hope he is not right, but we have to accept that valuation levels are as stretched as they have ever been during my three decades in the investment business. There are, though, reasons to believe that, even if the market needs a breathing space, a downward slide is not imminent.

At the meeting of our own investment strategy committee this week, my colleague charged with keeping the temperature of the US market under review pointed to the fact that there were still more bears than bulls amongst US investors. Moreover, he could point to the fact that the Fed had the economy closely under control, that technological advance was delivering higher profitability without forcing up wage rates and impacting upon inflation and that profit performance was consistently coming in ahead of analysts' expectations.

The most potent factor, in his view, is this preponderance of bears. He surmised that investment managers only tell you how they feel about the market after they have done whatever dealing is necessary to ensure they are ahead of the game, for fear of not being able to buck a trend they themselves may have kicked into being.

In other words, managers are bearish because they still have a lot of liquidity to put into the market. They want to see the market lower. This seems largely borne out by the evidence. Take the way in which Wall Street bounces so swiftly after a setback.

All this may not be a reason to believe the US market can go on breaking into new high ground consistently, but it does give comfort when trying to assess the scale of any setback. And since the US market will govern to a greater or lesser extent how we all do, I find that a very comforting thought.

Brian Tora is chairman of the Greig Middleton strategy committee and can be reached on 0171 392 4000

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