Jeremy Warner's Outlook: Bankers look forward to mergers frenzy

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The Independent Online

Fee-hungry investment bankers dismayed by the collapse in M & A activity can be comforted by the thought that there is one sector at least that will see unprecedented corporate activity next year banking itself. The collapse in prices for banking assets makes the sector wide open for opportunistic acquisition making by those with the capital strength to take advantage.

At the same time, the capital constrained position of some banks will turn them into forced sellers of assets. There is already widespread speculation of both Citigroup and HSBC setting up stall at the carboot sale of banking assets which is expected over the next six months.



Emerging markets and political risk

If further proof were needed, Benazir Bhutto's assassination demonstrates beyond doubt that many emerging markets, the darlings of investors these past four or five years, are still fraught with political risk. Her death leaves Pakistan bereft of any credible op position leader and is a manifestly devastating blow to Western hopes of a smooth transition to democracy. More worrying still, it adds further support to those who argue that Islam is incompatible with political liberalism and may even put Pakistan on the road to the same failed state status which has for so long beset Afghanistan and Iraq.

Pakistan may not of itself be of any great significance economically, but it is a nuclear power and its relationship and proximity to emerging markets of real importance India, China and the boom economies of the Middle East creates the potential for serious geopolitical tension and therefore economic disruption.

Perversely, developing economy stock markets have so far been a beneficiary of the crisis that has engulfed the Western banking system. Liquidity which would otherwise have flowed into riskier forms of debt has instead been diverted into emerging market equities. It's a funny old world which makes shares in such politically unstable countries as Pakistan an apparently safer bet than previously triple A-rated asset backed securities in the West, but that's been the way of it.

The Pakistan stock market was closed yesterday, so couldn't respond to Ms Bhutto's killing, yet spreads on Pakistan's sovereign debt widened markedly having already been significantly up on where they were a year ago.

Even before Ms Bhutto's assassination, then, investors were pricing the risks of Pakistani debt a lot more conservatively than was the norm at the height of the boom a year ago. The same is not true of the Karachi Stock Exchange 100 Index, which is up nearly 50 per cent this year, making it one of the best performing stock markets in the world.

It seems rather unlikely that it will maintain this position next year. Even so, the impact on other emerging markets, despite this latest reminder of the risks of investing in immature societies and economies, is unlikely to be that significant barring a regionally destabilising descent into social anarchy.

For most investors, the growth opportunities afforded by emerging markets will continue to outweigh the perceived risks.



And now for some more gratuitous predictions

Some readers have asked me to put a little flesh on the bone of yesterday's predictions for next year. One, rather impertinently, goes further to accuse me of dressing up what are in essence merely consensus forecasts as contrarian thinking and challenges me to stop fence-sitting and put some money on the table.

Found out at last, I'm afraid. What he alludes to is a common technique among commentators used to make mainstream thinking sound revelatory and somehow more interesting than it really is. It's achieved by presenting what in truth is a rather extreme view in this case on the future direction of the economy as the widely held one and then debunking it. Guilty as charged, though in defence it ought to be pointed out that anyone who took their opinion from the alarmist newspaper headlines of the past three months would indeed think the economy was heading for hell in a handcart. In fact, few commentators think there will be a recession in the UK next year, or an outright crash in house prices, and most stock market pundits think that shares will rise again.

Instead, the consensus forecasts is for growth of about 2 per cent and for a moderation in inflation back to target by the end of next year. Consumption is expected to slow, though not disastrously, unemployment to rise, and house prices will fall, again not precipitously. Against the boom times of recent years, this will feel quite austere, but it is hardly the economic armageddon predicted by some.

Responding to my reader's challenge to stop fence sitting, I would expect things to turn out a little bit better than consensus thinking. Central bankers have in the round responded as required to the crisis in credit markets, and by doing so have in all probability headed off the dire economic consequences that the doomsters have been shouting about.

The credit crunch still has the capacity to do very serious damage, yet the more benign way of looking at the turbulence of the past five months is that it has blown away the excesses of the boom and therefore served as a necessary brake on a record period of economic growth.

As for stock markets, I'm predicting more of the same a lack-lustre year of growth for Western markets spiced by continued outperformance in the major emerging markets of Asia and Latin America.



New Year honours list muddle again

I've always found it more instructive to muse on who hasn't been knighted for services to business in the New Year's honours than who has. So, rather than dwell on Stuart Rose's well-deserved gong, here are a few worthy candidates who have again missed out.

Most notable of these is Allan Leighton, who despite five gruelling years as chairman of Royal Mail has yet to receive any symbolic recognition for his labours. He must surely begin to think that it is easier to bribe your way to a knighthood than win it for time before the mast of public service.

A major postal strike mid-way through the year won't have helped his chances, nor will the payment of private sector-style bonuses to senior management for the achievement of performance targets.

No doubt the knighthood awarded to the chairman of Network Rail, Ian McAllister, is merited. But why him and not Mr Leighton? Royal Mail is surely a more difficult challenge than Network Rail, the turnaround of which is largely down to the lorry load of government money which has indirectly been showered upon it.

Attempting to bring the posties to their senses while at the same time dealing with the competitive challenge of postal liberalisation is self evidently a more difficult task. Is not the real reason that the Government doesn't want to risk offence by honouring Mr Leighton, a hated figure among some elements of the predominantly Labour-voting workforce?

Who knows. The criteria used are a mystery to all other than those on the worthy sub-committees now charged with vetting the shortlists, and even some of them profess complete bemusement. Yet there is at least one rational explanation for why so many business leaders who could once routinely have expected a knighthood are not getting them.

Arun Sarin, the chief executive of Vodafone and The Independent's businessman of the year, Peter Sutherland, the chairman of BP and Goldman Sachs International, Jean-Pierre Garnier, the chief executive of GlaxoSmithKline, Ben Verwaayen, the chief executive of BT so many FTSE 100 bosses are now foreigners, and therefore debarred. Hey ho.



j.warner@independent.co.uk

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