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 "

The only thing holding up the London stock market for some time now has been the hectic pace of bid activity. As yesterday's events showed, even this has become insufficient to the task. Though the takeover frenzy shows few signs of abating, the market seems set on correction mode.

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.

Start your day with The Independent, sign up for daily news emails
News
Ben Little, right, is a Labour supporter while Jonathan Rogers supports the Green Party
general election 2015
News
The 91st Hakone Ekiden Qualifier at Showa Kinen Park, Tokyo, 2014
news
Life and Style
Former helicopter pilot Major Tim Peake will become the first UK astronaut in space for over 20 years
food + drinkNothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
News
Kim Wilde began gardening in the 1990s when she moved to the countryside
peopleThe singer is leading an appeal for the charity Thrive, which uses the therapy of horticulture
Sport
Alexis Sanchez celebrates scoring a second for Arsenal against Reading
football
Life and Style
health
Voices
An easy-peel potato; Dave Hax has come up with an ingenious method in food preparation
voicesDave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
News
i100
News
Japan's population is projected to fall dramatically in the next 50 years (Wikimedia)
news
Life and Style
Buyers of secondhand cars are searching out shades last seen in cop show ‘The Sweeney’
motoringFlares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own