City & Business: Stocks heading south

WHILE Robert Chote analyses the detailed implications of the rate rise on page 8, stockbrokers at Hoare Govett calculate that the interim results season is pointing to an 11 per cent increase in dividends for 1994, on the back of a 9 per cent rise in normalised earnings. Mark Brown, Hoare's head of strategy, says the root cause of this exceptional performance is the dramatic upturn in company cash flow and liquidity rather than in trading conditions.

This suggests that companies are cutting debt and converting the related interest payments into dividends. That can go on only so long. Unless trading picks up to fill the gap, higher interest rates will not only syphon some of the flow back into bank coffers, it will begin to eat into assets.

Mr Brown forecast a modest slowdown in profits growth even before the rate rise, so there should be no equivocation among investors: the stock market is heading south until the interest rate spectre is lifted - whenever that is.