City & Business: Atishoo, atishoo - and we all fall down

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The Independent Online
Having flirted with a change to the big number both the London and US markets took fright on Friday. The FT-SE 100 Index did not quite make it through the 5000-point mark while the Dow Jones Industrial Average plunged well below the 8000 level it breached last week.

There was an element here of Wall Street sneezing and London catching a cold, but even before the Dow's plunge shares in the City were weakening, a little intimidated by the sight of 5000. This is all part of the hesitance that has left London trailing in Wall Street's wake over the last few years. When the FT-SE 100 broke the 2000 barrier in February 1989, the Dow Jones stood only around 200 points higher. Certainly this was familiar territory for the US market, having traded above 2000 before the 1987 crash. Even so until this point the two markets had enjoyed a certain symmetry.

But while the DJIA raced through the 3000 level in July 1990, it took London until August 1993 to reach such dizzy heights. By November 1995, the Dow was through the 5000 level which London is yet to breach. Now there is a 3000-point discrepancy between the two markets that is unlikely to narrow too dramatically.

US retail investors have demonstrated a voracious appetite for equities. While much of this has been targeted towards the high-tech stocks of the Nasdaq market the spill over into the senior index is unavoidable. The crash has been foretold many times in the last few years but has never materialised.

Meanwhile London has plodded quietly on behind. The FT-SE 100 Index has a frustrating habit of mirroring the Wall Street falls but never shadowing the meteoric rises.

There is no great logic to this. The good noises coming from Intel, the chip manufacturer, which drove the DJIA through 8000 are as relevant as the cautious comments from Microsoft that sent it back down again. However, in the global capital market national boundaries become less relevant and it is the asset allocators who are king. London is bound to take note of the movements if not the underlying explanation for changes in sentiment.

London investors will continue to be obliged to keep an eye on Wall Street. With Alan Greenspan, Federal Reserve Board chairman, due to give his half yearly report on the economy to Congress this week, another bout of the jitters can be expected. In February, when Mr Greenspan last testified, he sent shares into a tailspin with his comments about overinflated prices. Since then Wall Street has recovered its poise and breached both the 7000 and 8000 levels.

Mr Greenspan is unlikely to have become a raging bull in the last few months. More gloomy comments from the big man will add to Friday's woes and drag London down with it. Given there are strong arguments for a technical correction to London share prices to reflect changes to the tax on pension funds announced in the Budget, if Wall Street's sneeze becomes a cold then we are in for a severe bout of summer flu.

Size doesn't matter

One side-effect of rising share prices is to raise significantly the stakes for those who take active positions in takeover and merger situations. The most anguished watchers of the proposed merger between BT and MCI are the arbitrageurs who have been hoping to exploit price differentials between the two share prices. Meanwhile it is Bernard Arnault at LVMH who is making the most noise about the planned merger between Guinness and Grand Metropolitan. With stock markets placing ever higher valuations on companies, the gains and losses if you are caught out by merger activity become rather significant.

One estimate suggests that 25 per cent of the value of BT's pounds 20bn acquisition of MCI is tied up with arbitrageurs. Bernard Arnault is pressing for a stake in a combined drinks business that would also be worth billions. The very size of the sums involved tends to make minds boggle and can cloud judgements.

Both the BT/MCI and Guinness/Grand Met mergers find themselves with serious but not insurmountable problems. Those difficulties are made to appear more significant by the size of the sums involved. It is important for senior executives to seek to maximise value for the future rather than minimise costs of the present. That can only be done by focusing on the principles of the transaction, not its size.

Revving up

One of the unsung victims of the strength of sterling is Burmah Castrol. It has not kicked up a great high profile fuss but there is no doubt that it would be feeling much happier if the pound was not doing so well, particularly against the mark.

Its understated attitude has not escaped the market, and the shares have underperformed this year. That may not be an unreasonable response, but there is a sense that Burmah has been excessively penalised.

Burmah's pain is one of translation. It is not an exporter and therefore it is not losing business in any physical sense. Indeed the underlying businesses in its three main regions continue to perform well. Any reversal of the pound's strength will reduce the pressure on reported profits and in the longer term yield a positive benefit.

Despite the translation difficulties Burmah is still likely to show profits growth when it reports half-year results in a few weeks time. A clear hint to this effect was dropped by the company at its annual general meeting. Although currency translation will reduce profits by around 15 per cent, the company said that this will restrict growth, not erase it.

The clear inference to be drawn from this is that underlying profits are growing at more than 15 per cent - a pretty impressive performance. That is testimony to the strength of the Castrol brand and the quality of management. Although the shares have enjoyed something of a mini re- rating in the last week or so there is still much more to go for.