Derek Pain: Our top banker's warning has taken us by surprise

No Pain, No Gain
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The Independent Online

Profit warnings are regular features of stock market life. Even in good times they seem to occur with surprising frequency. When doom and gloom is in the ascendancy "red flags" become an all too familiar sight. In the third quarter of this year 51 companies felt obliged to tell investors that trading was not as good as hoped. There is a feeling that many more will be forced to join the bandwagon of reduced expectations in the final three months of 2011. After all, according to Sir Mervyn King, Governor of the Bank of England, the nation could be facing its worst ever financial crisis.

Last week a constituent of the no pain, no gain portfolio kicked off the final quarter with the dreaded warning. Patsystems, supplying sophisticated software largely for derivative trading, said it would achieve only a "modest profit" this year. Although there was little chance that profits would reach last year's £3.2m, the sharp deterioration since the group's summertime report came as a shock. Not surprisingly the stockbroker Arbuthnot has replaced its "strong buy" recommendation with "neutral" and cut its target price from 30p to 14p. As I write the shares bump along just below 12p; the portfolio paid 24p. The day following Patsystems' shocker, a company called FFastFill, in a similar line of business, also offered profits caution. Clearly, trading platforms are reducing, or delaying, cutting edge technology.

Still, one of the portfolio's oldest companies, operating in the long-established businesses of brewing and running pubs, has come up trumps, although its shares failed to respond. Marston's, the Pedigree and Brakspear brewer with around 2,150 outlets, reports "improvement in all trading divisions" and says profits should be in line with City expectations – around £80m.

Sir Mervyn's comment that the current financial upheaval could be the worst ever, even surpassing the 1930s, caught many commentators on the hop. Such an observation by a distinguished central banker could mean that the world is blissfully ignorant of the dangers ahead.

Most observers had merely fretted about a return to the early 1970s when the price of oil soared, inflation and interest rates ran rampant and the stock market slumped. But that crash paled against the 1930s. In the 1970s the FT30 share index ruled the roost. It is a much narrower measurement than the FT100 that is now used. In two years the FT30 fell from above 500 points to 146. Many alleged experts maintained that capitalism was finished. Then, according to a City legend that I feel contains more than a grain of truth, a few fund managers, lunching at the offices of the Prudential insurance giant, agreed shares were ridiculously cheap and decided to embark on a modest buying programme. On the day the managers met, 7 January 1975, the index rose 7 points from its low. It was a remarkable achievement, considering Burmah Oil, a major of the day, had just got into hopeless trouble. It was the first day of a stunning rally that took the index to around 350 by the end of 1975.

I must confess I had related the current debacle to much nearer the 1970s than the 1930s. Many observers, I suspect, took the same view until, perhaps, the authoritative voice of the nation's senior banker created unexpected fears of even greater hardship. Certainly the stock market has failed to get his message. The FT30 was not launched until 1935, so its contribution to any 1930s debate must be marginal. And, as reflected by the FT100 index, shares have not experienced the agonising drip, drip decline that so characterised the 1970s disaster.

Since the current banking crisis erupted shares have been highly volatile. In the past three years they more than halved at one time but then regained most of the ground lost until this summer's retreat. Even so, they are now not too distant from the level ruling before the present run of nervousness.

Like most of us I hope Governor King has inadvertently exaggerated our plight in these low interest rate days. If the country does encounter its worst ever financial crisis then the stock market is in for a horrendous time. Dismantling the euro, the cause of much of the latest trouble, could eventually ease the agony.

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