COMMENT : equities set to slide despite takeovers
"Signs of economic slowdown have been there for all to see since early summer. The outlook for corporate earnings too seems to be deteriorating, with an ever-lengthening list of profits warnings and gloomy trading statements "
Wednesday 11 October 1995
The surprising thing is that it didn't happen earlier. Signs of economic slowdown have been there for all to see since early summer. The outlook for corporate earnings too seems to be deteriorating, with an ever- lengthening list of profits warnings and gloomy trading statements.
As if this were not enough, the failure of the Government's gilts auction should have sent out a siren warning of things to come. Once the final prop of Wall Street was removed, the downward shift became inevitable. The FT-SE 100 share index was 67 points off at one stage, taking its fall from the peak in September to more than 4 per cent.
Has it got further to go? Serious corrections usually take around 10 per cent off the market so the answer is very possibly yes. Sentiment is being increasingly influenced by politics and here the outlook hardly inspires confidence. The Tory Party conference is off to a disastrous start and the numbers the Chancellor has to play with in the forthcoming Budget look as uncertain as ever.
There are other worrying straws in the wind too. Eventually the Government is going to call a halt to the takeover binge. The spectacle of UK plc being gobbled up in big cost-cutting mergers and acquisitions is for many a repugnant one.
The Lloyds takeover of TSB alone is likely to lead to the loss of up to 20,000 jobs, although you will not hear Sir Brian Pitman, chief executive of Lloyds, admitting to this when he announces details of the merger today. The Government needs headlines of this sort like it needs a hole in the head. However strong the pull of Michael Heseltine's "anything goes" mergers policy, you'd have to be away with the fairies to believe it will go on forever. The end may indeed be quite soon.
And if that goes, then the market begins to look highly vulnerable. Nick Knight, equity strategist at Nomura, may be right after all with his year- end prediction for the FT-SE of 3,200.
Tories push business into arms of foes
It comes as a shock to realise how far the political landscape has changed for business over the last12 months. With Tory MPs demanding windfall taxes and Labour yesterday promising to work hard in partnership with industry to create defence manufacturing jobs, telling left from right is no longer an easy process. Would Lord Weinstock prefer Michael Portillo or Dr David Clark as defence secretary? No wonder companies such as Tate & Lyle are placing each-way bets by splitting their political donations between the parties, and managers everywhere are suppressing their instincts by looking sympathetically at what Labour has to offer.
A survey by the Institute of Management found 54 per cent of respondents felt the Government had lost touch with the needs of business and 83 per cent approved of Tony Blair's belief in a closer partnership between government and business.
For anyone who remembers the CBI's promise in 1981 of a bare knuckle fight with Margaret Thatcher's government, the present tension between big business and the Tories is nothing new. The irony is that Michael Heseltine changed things for the better in his three years as President of the Board of Trade. He really cared about business and actively pursued many of the ideas Labour is now trying to cannibalise.
The problem is that with business, as with so many parts of the Government's natural constituency, the Tories have simply failed to deliver on their promises. In the blitzed construction industry, which is gasping for public sector work, the failure of the private finance initiative to fill the spending gap adds insult to injury. Furthermore, the Heseltine-driven new sensitivity to the needs of industry coincides with Labour's own policy reformation, to the point that the similarities are now much more pronounced than the differences, both at the macro-economic and micro-policy level.
Look at benchmarking, which Howard Davies, the new deputy governor of the Bank of England, refers to as the best recent idea to come out of the DTI. This is a government-aided exercise to measure the best international standards in a given industry and pass on the secret to those who are not so good, to drag up their performance. It is intervention, and its pedigree can be traced back to the National Economic Development Office that the Tories killed, but it is also cheap and effective. These days we hear as much about benchmarking from Labour as from the Tories.
Business leaders are still not convinced Labour means what it says. But the Government is saddled with the fact that for business there is at last a credible opposition.
US-style bank mergers not easily exported
Whether it be rollerblading or monster bank mergers, fashionable waves that begin in the US tend eventually to break over Britain and Europe. The Lloyds/ TSB plan to combine forces to bestride the domestic financial services sector could well be the catalyst for an accelerated series of takeovers and mergers. Banks across Europe are grappling with very similar pressures to the ones that have been driving the surge of consolidation in US banking - a combination of capital heaped in the coffers, and an increasingly fierce battle for business in a mature market with limited scope for growth.
The pace of consolidation in the US has to a large extent been driven by deregulation, breaking down the legal barriers keeping regional banks apart - an element that is not present over here. But the competitive pressures in an overbanked market, with too much capital chasing too little business, are the same.
The US preference for share buy-backs as a way of handing back excess capital to shareholders has had limited resonance over here. Barclays has had a first, timid go, but few of its competitors appear minded to follow suit. They are too concerned about keeping the chequebook ready for a big spend. But while the pressures for domestic consolidation remain intense, it is questionable whether the American merger wave will break with any force on a pan-European scale.
Just as investment banking is increasingly an international business, so retail banking remains fundamentally domestic, rooted in specific cultures, languages and national structures. Just look at the weak English banking penetration of Scotland, never mind the woeful experiences of British retail forays on the Continent.There may well come a time when European banking mergers become attractive, but for now the forces of consolidation are nationally driven.
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