money: Speculating on the cheap

Societies and life groups could be high on the takeover hit list
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Did you cast your vote in favour of Norwich Union's conversion to plc status yesterday? Are you likely to want to apply for more shares? Or are you like those people who add up to 27 per cent of Alliance & Leicester members and plan to dive for the exit as soon as dealings begin.

I found this last statistic mystifying. When we were seeking to add an extra share to the list of potential buys in the banking sector recently, one of my colleagues remarked how sad it was we could not yet include Alliance & Leicester.

With some regret, I must report this was not a judgement on the management or the positioning of the would-be bank. Rather, A&L was high on our list of likely bid targets.

Bid rumours have surrounded Norwich Union as well, as I mentioned before. Policyholders will receive the opportunity to apply for more shares as Norwich Union broadens its capital base.

Gearing up on your free holding might just be a way of speculating at relatively low risk, particularly as the consolidation of the life assurance industry still has a long way to go.

Life assurance is not a natural sector to select for prosperity under a Labour government, though. Investment returns may be held down, particularly if ACT changes are introduced. New Labour has indicated it would move towards a simpler and tougher regulatory system. Consolidating the self- regulatory organisations into a single governmental body may be the route it takes. Such a move would have its fair share of supporters, many from within the industry.

But it is hard to see that such an approach will make easier the business of selling life assurance products, or reduce the cost burden of complying with regulation.

Of course, the 27 per cent of Alliance & Leicester depositors and savers are delivering an important message to the market - which is nothing to do with their view of the society. It is estimated that this wave of demutualisations will be an even bigger boost to private share ownership than the privatisations of the mid-1980s.

The number of people owning individual shares will increase significantly because they will receive them free of charge and without needing to take action.

Privatisations were altogether more pro-active, needing a cheque to be written and a form to be completed.

But if a fair chunk of these new capitalists are deciding to turn their windfall into ready cash, we might see a surge in consumer spending equivalent to that spurred on by the housing boom of the 1980s. Moreover, it would be achieved without the increase in borrowing this earlier profligate period produced. Quite where consumers might distribute their largesse is far from clear, but many expect the holiday trade to be a beneficiary, while home improvements could be in for a boost too.

It might mean that, after this election, we have to look beyond the traditional beneficiaries of building and construction likely to benefit from a higher spending Labour administration.

For myself, I am taking the view that the way ahead is still far from clear. Witness the gyrations in the US, where the Dow took a hit of close to 150 points one day and, within a week, returned to an even higher level, recording the biggest one-day rise since the dead-cat bounce of October 1987. (Dead-cat bounces, by the way, are what happens when a bear market produces a rally and sucks in those who believe the bad news is all over. There is still no evidence that a bear market has started in the US.)

Caution aside, there are still buying opportunities, but I prefer to restrict myself to smaller companies just at present.

An exception might be Glaxo Wellcome, where the new hepatitis drug, lamivudine, has returned spectacular results in clinical trials. This is the same drug already in use for Aids sufferers, known as Epivir, and is one of range of new products Glaxo is bringing on stream.

The shares yield better than the market average and look a good bet for long-term private client portfolios.

Returning to smaller companies, experience suggests these are less likely to be affected by short-term market gyrations, although values can be decimated in a panic - as we saw in 1987. Trawling the bottom end of the Stock Exchange list has always been fun.

Perhaps I will return there next week.

Brian R Tora is the chairman of the Greig Middleton Investment Strategy Committee

Tel: 0171-392 4000

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