Business View: Shares sold off and a market savaged: now that's what I call realistic

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The Independent Online

Like many boys who grew up in the 1970s, I had an Action Man. One of the macho dolls' big selling points was "realistic hair". This hair had the consistency of the sort of carpet you get in low-rent offices and as much relation to reality as the current dreadful TV series on Five.

I'm reminded of Action Man when we talk about the new "Realistic Reporting" regime being imposed on insurance companies by the Financial Services Authority. From what I can see, it is barely realistic, is bringing confusion to reporting and is in danger of causing a collapse in the stock market.

Standard Life was thrown into turmoil last month by its need to be realistic, losing its chief executive and possibly its mutual status, and then being forced to unload £7.5bn of equities on the stock market to please the regulator. Abbey National became the second big victim of this regime last week. Abbey said that, although it had done quite well sorting out the mess in its wholesale banking business, it would not be able to share any of this bounty with shareholders because it was so worried about realistic reporting that it would have to keep the excess capital "just in case". It shares fell 12 per cent as a result.

Other companies showed uncertainty when talking about the new regime. HBOS, Legal & General, Aviva and the Pru all said they thought they'd be fine, but couldn't give much detail.

What is emerging is that realistic reporting is particularly tough on mutual insurers, not too friendly to people who sell a lot of with-profits products, will make damn sure any guarantee is well provided for and considers equities a damn sight riskier investment than bonds.

The last of these assumptions could become a self-fulfilling prophesy. According to analysts at JP Morgan, it would seem that Standard Life will only be the first of many firms forced to sell equities to live with the new regime. It reckons that insurance companies will have to cut the equity ratings in their portfolios to as little as 15 per cent (as opposed to the 30 to 40 per cent most have, and the 50 per cent Standard Life still has even after its sell-off).

To put this in context, institutional investors owning around half the shares traded on the London Stock Exchange may have to sell more than half of their equity portfolios. What effect will this have on prices? On the value of people's pensions? Or on the UK economy?

This is not healthy, prudent or, indeed, realistic. Think again you Action Men of the FSA.

Sir Martin and his loofah

There have been enough jokes about Sir Martin Sorrell and his bath. But you have to be careful before reading a recovery into what the WPP chairman said on Friday.

Sir Martin's analogy of a bath-shaped recession (steep drop at the tap end, bumpy ride along the bottom, gradual recovery) is compelling. But how does it fit with the predictions he is making for this year.

The ad mogul says that "quadrennial" factors such as the Olympics, the Euro 2004 football tournament and the US elections will push up advertising revenue this year, but that it is hard to predict what 2005 looks like. In other words 2004 might feel like a recovery, but it won't be one that can be sustained. The rise might be over a loofah lying at the bottom of the tub rather than the upward slope of the bath wall.

The longer this misery continues, the colder the water gets and the less comfortable a place Sir Martin's bath is to be.

With economics, we always lose

Another indication of recovery that should be treated with caution is last week's UK growth figures. While it might seem the economy is growing fast enough to meet Gordon Brown's rather optimistic projections in the (late) Autumn Statement, so reducing the risk of further tax rises, the danger is that the Bank of England will be so moved by this growth, it will want to choke it off.

When the Monetary Policy Committee meets this week, it might reflect that while growth might seem promising and retail sales strong, confidence is fragile. With eminent economists, such as Richard Jeffrey at Bridgewell Securities, suggesting the MPC could soon raise rates by half a point, it seems that if the economy is weak, we get hit with more tax, and if it is strong, we get hit by higher rates. You can't win.

j.nisse@independent.co.uk

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