COMMENT : Expect the stock market to run out of steam
Thursday 17 August 1995
The fundamentals do not look encouraging either. A recent spate of profit warnings has served to emphasise what was already a worsening outlook for corporate earnings. Takeover activity, share buy-backs and special dividends among the utilities may help buoy the position a little while longer, but by the end of the year even that kind of support will begin to run out of steam.
If London's position looks a little rickety, Wall Street's is positively scary. New York is so plainly heading for correction mode, with the froth all too evident in the present craze for technology stocks, that it is amazing it has managed to sustain such levels as long as it has. London may have gone some way to decoupling from Wall Street over the last year, but any marked setback across the pond is still going to have a severe knock-on effect in Europe.
Barton Biggs, Morgan Stanley's veteran stock market guru, believes this is a time for selling into strength, in London and more particularly New York. It is hard to disagree. The rest of his strategy, however - stick your money into Japan - is altogether more debateable. So far his advice and underlying analysis have proved spot on. The Nikkei has soared in response to what looks like a decisive turning point in the fortunes of the yen. Longer term, however, his optimism looks ill founded. Despite being more than 50 per cent down from its all-time high, the Japanese stock market is still one of the most highly valued in the world. On average, Japanese shares trade at nearly two times book value and yield less than 1 per cent.
The threat of trade war may have receded, the yen may continue to weaken against the dollar, for a little while anyway, but even so it is difficult to see how such valuations can be justified. Paradoxically, the possibility that Japan really has accepted the case for change, that it really is going to open its markets to foreigners, makes such valuations look even more fanciful. Becoming part of the outside world also presumably means averaging down to its standards and yardsticks. Japanese companies are no longer so superior that they justify the heady premiums they trade on. The long term outlook for the Japanese stock market remains fundamentally bearish.
Insurers could face a free-for-all
To question the future independence of the big British insurers just as they begin to show disturbing signs of becoming a picture of good health might seem a little ill judged. From their giddy vantage atop the profits mountain, the composite insurers probably view the foreign rape and pillage of investment banking as a remote distraction of little relevance to their comfortable destiny.
Such confidence may well be misplaced, for there are good grounds for suspecting that insurance is the next financial services sector to be shaken up. All the big European insurance players are pushing ahead with international expansion. So far the Continental giants have stopped short of the sort of knock-out acquisitions in the London market their balance sheets would allow. Not for much longer. Allianz, the German behemoth, will not remain satisfied with the rather peripheral presence in the UK of Cornhill. Generali of Italy is looking at the British market, and Axa of France, flapping its chequebook about, is in no mood to let any of its rivals steal a march.
As investment banking has shown, it only takes the first predator to lunge for the stampede to begin. The starting signal may well come from an unexpected quarter, Lloyd's. This calamity still hangs like a black cloud over the London insurance world. The prospect of collapse, even if it is getting remoter, understandably makes foreign acquirers nervous. If the Lloyd's trauma were ended, and that could happen as early as next spring, it might well set off a takeover free-for-all.
Conrad Black wins either way
Ever since being floated on the London stock market three years ago, The Telegraph's fortunes have been marked by controversy. It was no surprise that yesterday's figures should bring a fresh flurry of the stuff. This time, however, it was not Conrad Black who was in the thick of it but his independent directors. Keen to prove their virility and freedom of thought, they last May turned their noses up at Mr Black's offer of 470p a share for the minority. The shares have not seen that level since; on yesterday's results, they dropped further to 393p.
So should the faces of the independent directors be a deeper shade of red today? Could institutional investors, some of whom complained they did not get a chance to vote on Mr Black's proposal in May, actually have a case against the directors and their advisers for breach of fiduciary responsibility?
It all depends on how the Telegraph's future unfolds. Independent directors were adamant that any buyout ought to reflect the company's prospects, not its present situation. They said an end to the price war, and a lessening of the newsprint crisis, would lead to a rise in the Telegraph's value. Mr Black, they reasoned, should not be able to get the minority's shares at what in a scant few months might look like a steal.
The test is about to come. There seems to be at least a truce in the price war, if not an armistice. Meanwhile, newsprint prices are set to peak in the second half, and costs should come down thereafter. Analysts say improvements from now on are inevitable.
Certainly Telegraph management appears optimistic. A marked turn for the better is expected in 1996. Two cover price rises are planned, while cost-cutting (albeit not affecting staffing levels) is still the intended strategy. If circulation can be maintained at 1 million-plus for the daily, a 5p increase in the cover price is worth pounds 12m a year, much of it going straight to the bottom line. New arrangements with distributors are worth another pounds 2m to pounds 3m off the annual cost base.
If all this comes to pass, the share price should respond. Mr Black wins either way. Either he was right that 470p was as high as he should have gone, and the independent directors ought to admit it. Or he was wrong, and the shares race ahead to more than 500p, in which case Mr Black's 58 per cent holding looks very nice thank you.
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