Three issues will dominate the financials sector in 2002: bad debts, bad debts and bad debts. The collapse of Enron perhaps foreshadows a multitude of other company failures which, although probably smaller, could add up to hefty losses for corporate lenders. Mortgage banks will suffer if the slowing economy dents housing transaction volumes.
That sets the scene for deals. Perhaps Abbey National will approach Alliance & Leicester, which loses takeover protection in 2002. Lloyds TSB, frustrated in 2001 in its bid for Abbey, wants a European deal: Deutsche Bank would fit nicely.
Wall Street's investment banks are also ripe for restructuring, while any recovery in corporate activity remains uncertain.
The forthcoming policyholder vote on Equitable Life's compromise scheme should not end the drama in the insurance industry. Other life assurers will struggle to honour guarantees if bond yields weaken. Non-life companies, their balance sheets crippled by weak equity markets, may need to merge if they are to exploit rising premiums post-11 September.
The London Stock Exchange, bruised from losing 2001's auction for Liffe, remains a bid target. And with Sir Howard Davies' contract at the Financial Services Authority up for renewal, we could well see a new regulator.
After a heady year for Britain's brewing industry, dominated by the antics of Belgium's Interbrew, 2002 promises to be an altogether flatter affair. Expect action from Heineken, the Dutch brewer that was pipped at the Carling post by Coors of the US, as it seeks a route to market for its premium lager, Heineken Export. With the South African rand under pressure, South African Brewers – never far from the merger rumours in 2001 – will remain keen to convert some of its revenues into hard currency earnings.
Next year looks set to remain tough for hotel companies as the likes of Hilton, Six Continents and Whitbread tout for international travellers. Meanwhile, smaller provincial operators, such as De Vere, will have the slowing economy to contend with, as will health and fitness operators, with Esporta expected to be the first to go.
Prospects for travel companies will hinge on holidaymakers' attitudes to terrorism, only becoming clearer after the key January/February booking season. By then, we may know whether P&O Princess Cruises will succumb to its US predator, Carnival, leaving the UK market without a major cruise operator. The outcome will depend on the regulators and the market is likely to be left guessing for much of the year.
Expect a full flush for the gaming companies, as the Government gives its response to last summer's Budd report. Significant deregulation is on the cards, although much of the upside is already priced in.
The key to 2002 for media companies will be the timing and strength of a recovery in advertising sales, which dropped severely this year. Analysts are currently forecasting a comeback in the third or fourth quarter of 2002.
At the corporate level, early in the year we ought to get a solution to ITV Digital, the Carlton-Granada joint venture which has been bleeding cash. The service will either be closed or it will be radically restructured to reduce the cash its owners need to put in.
The industry is also waiting for the Government to announce a set date when the analogue television signal will be switched off.
Also, the Government will have to hop off the fence and pronounce on the proposed new rules for cross-media ownership. The thorny issue will be how to free up the market and yet constrain the monopolistic ambitions of Rupert Murdoch.
The future of ITV should also become clearer. A merger of the two main ITV players, Carlton and Granada, is on the cards but there are other predators circling both companies, including RTL, the owner of Channel 5.
The downturn and planned new media ownership rules should provoke considerable corporate takeover activity in all media sectors, as operators make strategic moves ahead of the new laws or find themselves in economic difficulty.
The past year has been exceptional for the high street with falling interest rates and a strong economic backdrop providing a huge boost to consumer spending. It has probably been the best year since 1997, when a raft of building societies demutualised, creating windfalls which set the tills ringing and made it seem like Christmas all year.
The coming 12 months promise to be more challenging. The economic backdrop is still helpful, with interest rates and inflation low and employment still high. But it is hard to see the trends being as positive as they have been. Verdict, the retail consultant, is predicting just 3.1 per cent growth in retail sales in 2002. This compares with growth of 6.2 per cent in the past year.
Some parts of the retail sector will continue to boom, with home furnishings and DIY tipped to be the main winners.
Clothing companies are expected to be in for a tougher time as retailers have to try to shift stock that did not sell during the warm autumn, before making a start on shifting next year's collections.
As for specific companies, 2002 really ought to be the year when the Marks & Spencer recovery gets going. Watch out for the key spring ranges, the first to be completely designed by the new team.
Other issues still to be resolved include Kingfisher – where Sir Geoff Mulcahy must stand and deliver on his promises to boost sales – and Boots, which has still to prove it can escape from the clutches of the supermarkets.
The technology sector is likely to have a better 2002 than 2001, but it is expected to remain volatile, with stocks faring better in the second half of the year.
The first half of the year is set to be dominated by continued uncertainty and a lack of clarity in order visibility as customers wait for signs of improvement in the economy before buying new gadgets.
Analysts such as Mike Sandifer of the Amerindo fund believe 2002 will be a better year for technology stocks than 2001, with a number of companies again able to consider launching their business onto the Stock Market through an initial public offering. But the feeling is that tech stocks will continue to be volatile.
Two key indicators of the direction of the industry are likely to be sales of both hardware and semiconductors – a barometer of the health of the PC market – as well as any increases in corporate IT budgets.
In the meantime, however, software and services firms in particular are likely to continue to have a rough time with customers continuing to delay spending on new "non-vital" IT systems.
Adam Lawson, an analyst at Teather & Greenwood, said: "Q1 2002 is likely to see some horrible numbers announced as finance directors shoehorn provisions and restructuring charges into the year to December 2001."
Following a rally in the telecoms sector in the autumn, which followed an exceptionally tough year, analysts believe that mobile phone stocks have the best chance of outperforming in 2002.
The valuations of fixed line telecoms companies are probably already fair, since they now take into account refinanced business models and reduced debt. However, those firms with exposure to high growth mobile phone divisions, or those which could benefit from having fewer competitors in the "alternative operator" space, should be watched.
The outlook for the alternative operators, analysts say, remains tough, suggesting that investors should opt only for companies with a high chance of survival, such as Colt Telecom.
Consolidation among mobile phone companies and the launch of limited third generation mobile phone services should provide mobile phone stocks with a fillip. This will be accentuated by the arrival of more innovative consumer devices in the 2.5G arena.
Overall, telecoms companies will continue to try to make the transition from flogging large numbers to focusing on raising margins by tempting people who already possess a mobile to buy a new, more fashionable handset.
In the so-called alt-net space, investors are expected to become ever more selective in their stock picks as more firms disappear. The telecoms team at Deutsche prefer Colt, Energis and Equant.
This year has been an extraordinary one for the transport industry and next year promises to be no less dramatic. For the airline sector, the challenge is to recover from the biggest fall in traffic numbers since the Gulf War a decade ago. For the railways, it is to restore the confidence of staff, passengers and investors alike following the trauma of Railtrack's collapse.
British Airways, which has already reduced capacity by 20 per cent and staffing levels by 7,000, is expected to make further cutbacks early next year when it announces the results of its "future shape and size" review. The likelihood is a dramatic curtailing of BA's short-haul European operations coupled with further heavy jobs cuts and perhaps a £1bn rights issue to recapitalise the airline. BA is also expected to complete its long-delayed transatlantic alliance with American Airlines.
On the railways, be prepared for slow progress in Stephen Byers' efforts to replace Railtrack with a not-for-profit trust, and a rash of mergers among train operators as the new chairman of the Strategic Rail Authority, Richard Bowker, sets about halving the number of passenger franchises to around a dozen. In February, Mr Bowker publishes his strategic plan setting out the key improvements he aims to make to the network over the next five to ten years.
The issue of generic competition the threat to big pharmaceutical firms' earnings when their blockbuster drugs lose their patent protection and copycat products enter the market will continue to be the dominant theme in the sector in the early part of 2002. AstraZeneca's crucial court battle to extend patent protection for Losec, its ulcer drug, is scheduled to wrap up at the end of January, while GlaxoSmithKline is also in court to try to protect Augmentin, its multi-purpose antibiotic. Shire Pharmaceuticals faces copycat competition to its largest drug, for hyperactive children, in the coming months, too.
At the lower end of the food chain, biotech companies will be struggling to raise more cash to pay for the expensive drug trials that, they all hope, will throw up a blockbuster of the future. There has been little investor interest in the sector in 2001, but analysts hope that all the talk of bio-terrorism which requires bumper amounts of vaccines and high-profile scientific breakthroughs will send fund managers reaching for their cheque books. If not, several smaller companies could run out of cash. That precarious situation will lead to the usual plea for consolidation among companies with promising but small product pipelines. But will the sector's entrepreneurial egos allow it?
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