Clarke's luck could run out third time around

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The Independent Online
There is nothing like well publicised disagreements to prove that monetary policy arrangements must be working. Or so Kenneth Clarke and Eddie George would have us believe Their only big fights are about who is hogging the ashtray, Mr Clarke insists. He is right to say that the evidence about the state of the economy is almost always mixed, and reasonable people will sometimes make different judgements about it. The clashes also suggest that the published minutes of the monetary meetings are not too heavily doctored.

However, after the previous two disagreements since the arrangements have been in place - in February 1994 and May 1995 - the economic evidence has quickly swung the Chancellor's way and changed Mr George's mind. Will Ken be lucky a third time? Recent figures suggest that he might not. Although there are clear signs that short-term inflationary pressures are fading, other figures suggest that the slowdown in the economy will be short-lived, a contradiction Mr Clarke himself contributed to with his lively Budget growth forecast.

Mr George's message was that the inflation target would probably be met, and there was room for a modest cut in base rates. But he advised Mr Clarke not to go too far too fast.

There are two reasons singled out by the Governor. One was the rising trend in pay settlements. January is one of the most important months for settlements, which have been drifting gently upwards, and he was worried that being too lax with interest rates would send the wrong signal.The second was the rapidly accelerating pace of money and credit growth. The broad money measure, M4, burst out of the top of its target growth range in November and climbed into double figures last month.

Critics have accused the Bank of England of being far too cautious about interest rates - dismissing the fact that the last thing we want is an incautious central bank. At least Mr George has changed his advice when the evidence moves on. In the year before a general election it is probably too much to hope that Mr Clarke will change his mind if his luck runs out and the figures go against him this time. But if he did, in that case, accept that there was no room for more reductions in interest rates this year, he would definitely prove that the monetary arrangements are working.

Alliance goes for the fast track

Last in, first out - that appears to be the Alliance & Leicester's strategy. It is the final one of the batch of building societies widely tipped to abandon mutuality for bank and plc status to make the formal decision. But the lengthy preparations behind yesterday's announcement were aimed in part at speed, enabling Alliance to leapfrog Halifax and Woolwich and get its float done first in early 1997.

There is sense in this. For the sooner the float, the earlier the society benefits from the five-year shield against takeover provided by the Building Society Act. Furthermore, there is going to be a handout of shares to members worth some pounds 15bn on today's calculations during the course of next year. This is a sizeable amount, risking a bout of indigestion in the market. Institutions, notably the tracker funds, will take some onto their portfolios, but perhaps not as much as the aspirant floaters expect.

There are plenty of uncertainties between then and now, one of which is the tense situation on the mortgage front, where fierce skirmishes threaten to escalate into a full-blown war. This places the floating societies in a bit of a fix. Should they join battle vigorously, they will find a cut in rates quickly punishing the bottom line.

Businesses such as Halifax and Woolwich are heavily dependent on mortgages. A large slice out of profits would obviously do no good for their float valuations, and for the hopes of those millions of members rubbing their hands at individual windfall share handouts worth anything between pounds 500 and pounds 1,000 on average. Moreover, a mortgage war drain on profits would leave the wannabe-banks more exposed at this vulnerable pre-float stage. Make no mistake, there are plenty of predators sniffing the breeze in the shires. Royal Bank of Scotland, for one, makes no bones about its ambitions to expand southwards, and a building society at a cheapened price would do very nicely.

Alliance & Leicester is probably the safest, having diversified its business. Its position as Britain's leading telephone banking operation with the Girobank makes it much less exposed to a mortage war of attrition. So the chances are, to save their valuations, Halifax and Woolwich will have to stand clear of a mortgage punch-up. They are counting on the promise of a large free share handout next year being sufficiently attractive to keep their customers away from the lures of cheaper loans and better savings rates offered by some of their mutual-to-the-death rivals. On that count, they are probably right.

Bidders sniff around Pearson

The demerger trend has come late to the red-hot media sector, where companies have been more inclined to expand across-the-board (programming, distribution, new and old media) than to concentrate on particular markets. But pressure is building on conglomerates to follow the fashion, particularly those with non-media interests mixed into the bargain. At least two candidates for demerger, Pearson and MAI, are likely to oblige.

Indeed, if they do not move on their own, hostile bidders may do the work for them. Pearson, once thought to be close to bid-proof, is now a potential bid candidate, and is trading well above the range analysts have fixed on fundamentals.

All it takes, say the pundits, is a few members of the Cowdray family to break ranks; institutional shareholders, so the theory goes, would jump at the chance to cash in.

Pearson is trading at about 660p. Broken up and sold off, it might be worth pounds 9. A less radical option, spinning off the media and entertainment assets, might be worth pounds 7.60 a share. Institutional shareholders will not be patient if Pearson management, only recently awakened from a sleepy few years at the wheel, cannot tease out value from a spate of investments in media and publishing.

More to the point, there may be even greater institutional appetite for media stocks in the future. Fund managers will be attracted by growth of about 15 per cent for the sector over the next two years, compared with just 9 per cent for the market as a whole. That follows outperformance of 42 per cent since 1991.

Fund managers, by necessity, will be eyeing company strategies carefully, intent on picking the winners. Increasingly, those winners will be the specialists with focused management, not the grab-bag of disparate assets that some UK media companies have become.

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