City: Talk of upturn has a hollow ring

RETURNING from the summer holidays to the interim results season this year is turning out to be a little like stepping from a warm bed into a cold shower.

If you only paid attention to the profit figures on the press releases, you would probably emerge at the end of this week with a fairly upbeat view of industry's chances. You might even start buying shares. Don't do it. There is more to the story than that.

The interim results announced by a spate of major companies this month show, for the most part, a modest increase in earnings. Hillsdown, P&O, Prudential, Cadbury Schweppes and Coats Viyella will all have profits sneaking upwards. At the same time, dividends may not rise by much, but they will not be cut either. (The big exception, of course, will be the building sector, which will not only report big losses but will surely accept the dividend cuts they shirked last year.) No doubt the usual Tory politicians will proclaim that this proves the recession is over.

Unfortunately, it proves little more than that cost-cutting is having an effect. That leaves companies better able to take advantage of an economic upturn when it comes, but the doubts about a stout improvement in 1993 are already growing.

In the meantime, there is precious little evidence that underlying company performance is moving ahead again. Quite the opposite, if you listen to what the companies are actually saying. You can't get much blunter than Courtaulds Textiles last week, when it declared: 'There are no signs of improvement in trading conditions.'

It is statements like that which will focus the stock market's mind. City analysts will be forced to downgrade their full-year forecasts for many companies even after seeing slightly better half-time results. The process started last Thursday, when no fewer than five companies reported their interims, only to have analysts downgrade their year-end estimates. Even though the shares of more than a quarter of the FT-SE 100 companies are yielding over 7 per cent (the highest level since the run-up to the Gulf war, when interest rates were around 15 per cent), the market still looks as though it may have further to fall.

The joker in the pack is exchange rates. Everything depends on sterling. If, as UBS Phillips & Drew believes, the pound is destined to fall in the next few months come what may, companies with substantial overseas earnings may be the only shares worth going for. Half the FT-SE 100 company earnings come from abroad, and most of that is in dollars.

But if the Government holds the line on sterling, not even multinationals such as Unilever, Guinness, ICI and BAT will be worth going for. The dollar may take months to recover, and European markets such as Germany, which have been the saviour for many companies over the last few months, are now grinding to a halt. Cold comfort for the end of summer.