City & Business: You may think that, but will it really happen?

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The Independent Online
WHAT will 1994 hold for the City and business? If there was ever a right time for crystal-ball gazing this is it, so here goes.

The economy: A slow, faltering recovery continues. Most of us won't notice it at all. It will come and go like a Cheshire cat, visible perhaps only through the monthly outflow of official economic statistics. Most of us will feel worse off as the Chancellor's tax hikes begin to bite and the recovery will seem something of an illusion.

Property: I'm a bull of the property and housing market. Interest rates are so low, the housing market still so depressed and the sort of mortgage deals being offered by banks and building societies so good that there cannot but be a substantial pick-up in house purchases. Last week the Halifax forecast a 5 per cent rise in house prices for this year; as usual, its prediction will prove wide of the mark, only this time round it errs on the cautious rather than the optimistic side. House prices will rise a lot more, particularly at the 'posh' end of the market in the South-east, where you can expect bumper City bonuses to give the market a substantial boost.

Politics: John Major will survive European elections, which will see the number of Conservative seats reduced from the present 31 to single figures and an equally disastrous showing in the local elections. The angst-ridden John Patten and William Waldegrave will be ejected from the Cabinet. Kenneth Clarke will consolidate his position as the power behind the throne, but he won't get the opportunity to dislodge Mr Major. On the whole it will be a boring year in politics - the Tories unable to summon up the courage to ditch Mr Major and the Labour Party mounting no more than its normal soporific level of opposition.

The markets: The pound will continue to strengthen against the mark and the franc as the economy climbs out of recession. Equity and bond prices will drift, ending the year a little up on last but not by much. A crash? Yes, eventually, but not yet, and even then it won't be the searing, depressive sort of crash that occurred in 1929 and 1974. When it comes, it will be much more like what happened in 1987, bad enough for investors and the City but with very few obvious knock-on effects in the real economy - more a correction than a crash. It won't happen in 1994, however, although there are plenty of warning signs. Share prices have never been as highly valued as they are now - only before big crashes have they achieved such valuations. And small investors are pouring into the market like there's no tomorrow, as sure a sign as you can get for a good contrary thinker that it's time to get going. But it is equally the case that a crash has never yet occurred at this stage of the economic cycle, and it would break all the rules for it to happen now. You need a couple of years of sustained growth, clear signs of overheating in the economy and at least a sighting of the downturn on the horizon before the psychology of the crash proper begins to take hold. The reason share prices have become so inflated is two-fold. First, interest rates are so low that they have driven investors out of alternative investments such as bonds, cash and property into equities, which look good value by comparison. Secondly, the recession has been much more prolonged than anyone anticipated, with the effect that valuations have become unduly stretched. It's been a bit like waiting for Godot; eventually and inevitably the recovery in corporate profits will come and then these valuations won't look so expensive, the bulls claim. That's not to say everything is fine for equities in 1994. I suspect a serious headache is in prospect after December's spectacular bull run. But a big correction? No, not yet.

Interest rates: The trigger for a crash would be a rise in interest rates, which would signal official concern over a return of inflationary pressures. There's hardly any chance of it in the UK over the coming year, though it's possible in the US, which is a good year in advance of us in the economic cycle. Though the US economy is still subdued and inflation still relatively low, the Federal Reserve Board is at some stage going to want to go on record as showing its determination to beat inflation once and for all. Once interest rates start to move up, equities won't look so attractive and private investors in the US will start returning to traditional savings havens. Wall Street will crash, taking London with it. But I doubt it will be this year.

Regulation: Derivative trading will become the main target of City regulators in 1994. In some cases, derivative trading has become much, much larger than the physical markets on which it is based. The regulators largely don't understand it (I'm not sure anyone does when it comes down to it), and they certainly don't have much control over it. Much of it takes place 'over the counter', outside their sphere of influence. Expect a chorus of warnings about the dangers of unregulated, unsupervised derivative trading as the regulators clamour for a greater say.

Takeovers: Don't expect a return to the mega-merger boom of the mid-1980s, when undervalued and undermanaged assets were the focus of attention. Everything is expensive these days. Rather, the focus will be on rationalising, consolidating, cost-saving mergers, takeovers and allegiances. With the oil price at an all-time low, the oil sector will be a particular object of attention. Lasmo, following its doomed takeover of Ultramar a few years back, cannot hope to last the year as an independent company. There will also be wide-ranging consolidation among the smaller North Sea independents. With its City credibility fully restored, BP can be expected to launch a whopping great rights issue. Fisons, the troubled pharmaceuticals company, will be gobbled up or disembowelled, though at an awful price. 'Vertical integration' will become the catchphrase for a number of sectors, including telecoms and pharmaceuticals, posing countless new competition issues for the Office of Fair Trading and the Department of Trade and Industry.

Telecoms: Huge changes are in prospect within the European telecommunications market. Liberalisation and privatisation across the Continent will go hand in hand with the trend towards multi-media takeovers and mergers. BT and other leading players will be looking to bolt on value-added services to offer through their distribution networks, from music and film to video games and advanced business systems. Also expect a series of international tie-ups and allegiances, some of them culminating in takeovers and mergers, as the big players jostle for position in the global telecoms market.

Pharmaceuticals: 'Vertical integration' will also determine takeover activity in the pharmaceuticals sector. Merck, the largest US ethical pharmaceuticals company, has already taken the plunge by paying pounds 3.9bn for Medco, the country's largest mail-order drugs distributor. Others will be loath to follow the path it has beaten in such a radical fashion, but all are keenly aware that patterns and channels of drug distribution are changing fast: it's keep up or die. No longer is it possible to be a pure, research-based prescription drugs company. The trend towards self-diagnosis and over-the-counter drug sales, as governments attempt to cut back on health-care costs, has gathered irresistible force. Boots will be a big beneficiary of the trend; it is uniquely placed to become one of Europe's leading distributors and retailers of health-care products.

The SFO: With three big fraud cases looming - Nazmu Virani, George Walker and the Maxwell brothers - the SFO is set to suffer a series of further setbacks. By the end of the year there will be a near-hysterical public and political outcry over its performance.

Insider trading: A new catch- phrase has entered City parlance, which traders say is virtually bullet-proof as far as the new insider- dealing law is concerned. It is Francis Urquhart's (House of Cards): 'You may think that; I couldn't possibly comment.' Expect many thousands of hours of expensive legal time to be spent debating whether this amounts to 'counselling or procuring' someone to buy shares under the terms of the insider-dealing law.

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