COMMENT : Farewell to the amateur fighting on all fronts
"The Barings collapse may be the fall from grace that everyone will remember but Warburg's is the more important, the one that symbolises the demise of the independent British securities house."
Thursday 04 May 1995
The Barings collapse may be the fall from grace that everyone will remember but the Warburg one is the more important, the one that symbolises the demise of the independent British securities house. There will, ofcourse, be a continuing role for small national niche players in the world's financial markets, but, for the next 10 years at least, the global reptiles, backed by state-of-the-art management systems, information technology and, most important of all, the big balance sheet, will rule. The day of the small, amateur British player, trying to fight on all fronts, is over.
Barings, and to a lesser extent Warburg, may have largely brought it on themselves but it is also the case that their domestic franchise was probably always too small to give them the critical mass necessary to compete on a global scale. The remaining houses - Flemings, Rothschilds, Schroders, Smith New Court and Kleinwort Benson - must be swift to learn the lessons if they are not to go the same way. Specialise or merge seem to be the only options.
Does it matter? For the health of the City, possibly not very much. The City's position as Europe's leading financial centre is pretty much assured despite the incompetence laid bare by the dual scandals of Lloyd's and Barings. It is, however, a City increasingly dominated, as far as securities markets are concerned at least, by foreign banks. Most of us would agree that for control to lie elsewhere cannot be a good thing long-term.
Forwards into the past
Wall Street has been powering ahead, to levels that many did not expect to see until the end of the year. The return of takeover speculation is one cause, but on economic fundamentals too investors are now looking through the current slowdown in the US economy to a new spurt of growth.
Two factors are underpinning the bull run. First, the Fed seems to be holding back on the sort of restrictive monetary policy that would kill off any new recovery. There is also now talk of a return of Japanese investors to American markets, on the grounds that the dollar cannot fall much further.
The London market has edged up in fits and starts in New York's wake, hitting a new high for the year yesterday. The FT-SE 100 is more than half way back from its recent low point to the all time high of 3,502 reached in February 1994, and predictions that it will set new records later this year are now beginning to look perfectly reasonable. How much further have shares got to go?
Quite a bit, judging by the fact that the prospect of a half-point on base rates, pressure on consumer spending from costlier mortgages and the likelihood of a Conservative rout in the local elections have all failed to dent the market. So far then, the bull market seems solidly based.
Company results have been coming in as good as or better than expected, as Whitbread demonstrated yesterday. Dividends too are generally above expectations. Even the utilities are becoming resistant to speeches by Gordon Brown, whose pro-competition remarks this week helped take the edge off fears of a change of government.
Indeed, Labour's preference for manufacturing over other sectors of the economy may be rather well timed, judging by new research from Mark Brown of ABN-Amro Hoare Govett. He sees the beginning of a natural cyclical shift from consumer sectors to firms that manufacture. Labour would certainly be delighted to encourage that trend.
Consumer companies outperformed capital goods by 200 per cent in the 1980s, one of the biggest structural shift in the stock market since detailed records began in 1962. This was not just a change in relative valuations; it was underpinned by company performance which bounded ahead with consumer spending. There is plenty of evidence to back Hoare Govett's view that the cycle is turning again; manufacturing output is quite likely to outgrow consumer spending until the end of the century, with pressure on prices offset by better productivity.
If it is true that Britain has finally escaped the old pattern of boom and bust, then manufacturing ratings could rise to the levels they were at in the 1960s. Amazingly, the growth stocks of the 1990s could be the likes of British Aerospace, British Steel, GEC and Rolls-Royce, the latter of which, coincidentally, was yesterday's second best performing share. On the basis that what goes down always comes up, expectations of a revival of manufacturing have a ring of truth to them and could help the market to new highs.
Better late than never, but still too late
The British have a tendency to pat themselves on the back as the investment supremos of Europe. Not withstanding the shock of Warburg's humiliation, there is still very much a sense that London is home to some of the greatest financial expertise in the world. The Treasury's belated attempt to introduce open-ended investment companies to this country, however, shows that there is one significant sector where the British are lagging well behind their Continental rivals. These OEICs, pronounced in a manner well suited to the British industry's behaviour on this issue, are a souped-up corporate version of unit trusts.
They offer all sorts of advantages, including greater flexibility and single pricing, and will shake up the investment industry when introduced next year. The question is, why so late? When the European directive on frontier-free marketing of mutual funds took effect in 1989, the City sat back waiting for the rustle of Continental cheque books. To their horror, London fund managers realised that unit trusts are unsaleable abroad - where investors find dual pricing not just incomprehensible, but dodgy to boot.
Instead, the money started legging it to Luxembourg and Dublin, as investment banks set up operations to sell OEICs on the Continent, and even market them back into the UK. The OEIC market operating out of Dublin and Luxembourg has grown so explosively that the Treasury has started to panic about London's position in this field. The domestic industry is now wringing its hands about how to close a 10-year gap.
The prospects of winning back for London the Continental custom forgone in the past six years are slim. Even when able to offer Continentals products they know and understand, there will still be the problem of tax. Foreigners like their dividends paid gross, but the Inland Revenue appears unrelenting. For British investors, however, not only will single pricing get rid of much obfuscation, it should cut costs by as much as 7 per cent. Better late than never, but hardly supremo stuff.
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