Ex TMT, stock markets have never had it so good

TMT; Railtrack solutions; Caledonia squall
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Don't whisper it too loudly, but the UK stock market yesterday reached a new all time peak, as indeed it has been doing all this week.

Don't whisper it too loudly, but the UK stock market yesterday reached a new all time peak, as indeed it has been doing all this week. Before you pick up your phones to accuse of us of a terrible mistake, the claim refers, of course, to the stock market minus the bubble sectors of technology, media and telecommunications. None the less, the occurrence is startling enough to be worthy of comment.

Ever since the technology bubble burst a year ago last March, the old economy has been bouncing back. Strip out the now dead weight of TMT and the market has achieved an astonishing capital gain of nearly 35 per cent over the last year and a quarter. In part this gain has been on recovery from the depths to which old economy stocks sunk during the technology frenzy, when nobody wanted to know about companies with anything as vulgar as profits, dividends and a healthy balance sheet.

It's hard to credit now, but this was a time when the pony tails of the internet were going to sweep all before them and the dinosaurs of the old economy could look forward only to rapid decline and eventual death. It was nonsense, of course, but for a while investors in their hundreds of thousands bought the message, and even the wisest and most thick skinned of old economy chief executives began to wonder whether their number was up.

Well now the boot is on the other foot. It's miserable at the forefront of the communications revolution but the old economy has once more found its place in the sun. Even industrials have been on the move in recent months, spurred by big cuts in interest rates and a weaker pound. But almost every sector other than TMT has had its moments. Retailers have been strong for more than a year, cyclical and defensive stocks have come back into fashion, and most recently pharmaceuticals and oils have spurred the market to new highs.

Against other markets too, UK stocks minus TMT have been outperforming. This is more a reflection of the exceptionally heavy weighting of oil and pharmaceuticals, which account for nearly 30 per cent of the UK market's entire value, than anything else, but it does neatly highlight how the clever investor could have made substantial money from switching even during the depths of what is now widely described as a bear market. If you had been index tracking for the past one and a half years, you would now be seriously out of pocket. Actively managed funds have come back into their own.

So has the time now arrived for another rotation, back into TMT? That's a far less obvious call than the last big switch, and not just because the relative valuations were then so ludicrously and self evidently out of kilter. The old economy has also been highly effective in moving onto the net, embracing the digital revolution, making them its own, and heading off the competitive challenge that they posed. Today, all companies are internet companies and the power of big, traditional business remains as strong as ever.

That said, some pure technology companies have sunk so low that they no longer sell at a premium to the rest of the market. The same, unfortunately, is not yet true of telecommunications, which has quite a bit further to fall before it hits the utility rating it once commanded and probably still deserves.

Railtrack solutions

It was a good day for Railtrack yesterday. The shares only fell another 4 per cent and Moody's decided not to downgrade its credit rating for now. The sense, however, of a company in terminal crisis becomes more pervasive by the day.

The collapse of the share price has dashed any lingering hope Railtrack might have had of staging a rescue rights issue and confidence in the company is now so fragile that it may also find access to the debt markets is closed off as well.

Meanwhile, the challenge of maintaining, renewing and enhancing the network becomes yet more daunting. There is no inexorable reason why the Government should succumb to Railtrack's latest blackmail demand for £2.6bn, save to prevent it going bust, and it seems inconceivable that Railtrack can bridge the funding gap through efficiency improvements given the huge leap it already needs to make just to stand still.

The Strategic Rail Authority's Sir Alastair Morton spotted the black hole Railtrack was falling into long ago and is already making plans for the upgrading of the network to be handed over to a shiny new fleet of "special purpose vehicles".

Now the train operating companies are agitating for what's left, the operation of the network, to be taken away from Railtrack and passed to them. They aren't interested, needless to say, in actually buying the tracks, signalling and stations. But they do want to take over the job of looking after them so that the network is available when they want to run services.

This would be akin to recreating the golden age of Victorian steam when the railways were vertically integrated and owned by a series of regional companies like the Great Western Railway. Superficially it looks appealing. But the reality is that it would be a dog's breakfast. Save for Scotland, where ScotRail operates 95 per cent of services, there is too much shared track to allow such a system to work sensible. The decision to split ownership of track from operation of trains may have manifestly failed the travelling public. But a return to Victorian times is not the answer.

Caledonia squall

Caledonia Investments is doing its utmost to keep the row that is going on in the Cayzer Trust a private family matter, but it is hard to see how spill over into its own affairs can be avoided. Just to recap, Sir James Cayzer, 68, supported by some other members of the family, wants to realise his share of the Cayzer Trust, whose principle asset is a 34 per cent stake in Caledonia. The trust has offered to buy him out for around £30m, but he wants a higher price that reflects the underlying value of Caledonia's star studded portfolio of investments. Caledonia shares trade at a discount of around 25 per cent to its asset value, so there's quite a difference.

Like so many of the Cayzers' business ventures, Caledonia has proved itself an astute investor (it lists big stakes in Close Brothers and Friends Ivory & Sime among its investments), but even so the discount is at the very top end of the range for investment trusts. Narrowing or getting rid of the discount is the holy grail of all investment companies, but Caledonia has been less successful at it than most.

It's a problem. Equally hard to see, however, is how the Cayzer Trust can pay Sir James what he wants absent of a complete liquidation of Caledonia, which in turn would mean a sizeable chunk of the cake going straight to the taxman. It is only possible to speculate on what is really motivating Sir James - some ancient family feud, perhaps - but if liquidation is what he's after, he must first ask the permission of Caledonia's other shareholders. The Cayzers might think of Caledonia as their private fiefdom, but in fact they own only 34 per cent of it.