Jeremy Warner's Outlook: A remarkable turnaround in perceptions. All of a sudden, Vodafone is flavour of the month

Threat to incumbent stock markets; Inflation: a question of rising expectations; Acambis: last in a two-horse race
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The Independent Online

Little more than six months ago, Arun Sarin, chief executive of Vodafone, was one of the FTSE 100's dead men walking. Few would have given him more than an even chance of survival. Along with Charles Allen at ITV, he was widely thought of as for the chop. As it happens, one of them was, but not Mr Sarin. Now he seems to be through his night of the long knives, and with the new chairman, Sir John Bond, apparently full square behind him, comfortably out the other side.

To say he's back on the front foot may be jumping the gun, but he's certainly off the back one and, on the evidence of figures published yesterday, beginning to show signs of real progress. "Bulls have plenty to be happy about in these results," Dresdner Kleinwort's telecoms analyst, Robert Grindle, was quoted as saying.

Could he really be talking about Vodafone, the company everyone was once so unhappy with that large elements of the City wanted it broken up? Why, yes. "Very little to complain about, I would say", said one leading investor. The contrast with a year ago, when Mr Sarin was warning of a crushing unpaid tax bill and much tougher conditions in Europe, could hardly be greater. One way or another, Mr Sarin has managed to silence his critics. Even the share price is surging, though it remains miles below its turn-of-the-century peak.

What's produced this remarkable turnaround in perceptions? A decent set of results always helps, and, after a long period of disappointments, that's what Mr Sarin managed to deliver yesterday. Cash generation in the half year to 30 September was comfortably ahead of market expectations. The tax charge is coming in lower than anyone predicted too, providing a sizeable boost to earnings.

Just as important, most of Mr Sarin's judgement calls, widely rubbished just a little while back, have turned out to be correct. In particular, it appears he was absolutely right to hang on to the company's 44 per cent interest in Verizon Wireless, the US mobile operator, against calls to divest. If he'd done what the hedge funds had wanted, he would now find himself being lynched by the mob for selling at such an undervalue.

Selling out of Japan, Sweden and now Switzerland, on the other hand, appears to have been a perfectly rational strategic decision. These were markets which for Vodafone were going nowhere. On the other hand, the strategy of buying into a number of emerging markets, where Vodafone was much criticised for paying too much, has been wholly vindicated. Turkey has proved an outstanding success, and even the minority stake in India has soared in value.

Nor can a company that has managed to pay back around a quarter of its market capitalisation in dividends, share buy-backs and recapitalisations over the last three years convincingly be described as a financial disaster. On this front too, Mr Sarin has delivered all that investors could realistically have expected.

Yet profound challenges remain, particularly in Europe, where prices are deflating at the rate of around 15 per cent a year. Though Vodafone and rivals protest, markets in Europe are essentially ex-growth, and there's little they can do to counter the trend other than cut costs to match. Volumes will continue to grow sharply as more applications are added, but they may struggle to keep pace with the fall in prices.

Hard to credit, given what a relatively "new" industry mobile telephony still is, but this is already a mature-as-mature-can-be business now openly talking about the need for consolidation. Competition regulators allowing, Vodafone hopes to lead the process.

Much of the problem Mr Sarin had with perceptions lay in returning overblown expectations to reality - that and a dysfunctional board apparently intent on knifing each other to death. Both these problems seem now to be in the past.

Threat to incumbent stock markets

Major investment banks have been threatening to set up an alternative pool of liquidity to rival national stock markets in the trading of European equities for as long as I can remember. Now, and in response to the European Union's Markets in Financial Instruments Directive (MiFID), they've actually pressed the button with a memorandum of understanding between the big seven investment banks for the establishment of a completely new trading platform.

Most national bourses, including the London Stock Exchange, downplay the competitive threat likely to be posed. By driving down transaction costs all round, MiFID should help create a virtuous circle of rising volumes in which all can share - new and old platforms alike. The LSE, in any case, thinks that its latest trading technology, making it the fastest in the world on transaction times, will help keep it ahead of the game.

All the same, it's hard to see how this, and other multilateral trading facilities likely to be established after the single European market in financial instruments is given statutory backing late next year, can be anything other than bad news for the incumbents. They've enjoyed a monopoly of their local markets. This is now going to be much tougher to maintain. Transaction costs will fall sharply, while competing pools of liquidity will also generate alternative sources of market data and broker services, another key source of revenue for incumbents.

Of course, there is many a slip, and a memorandum of understanding is a long way from being the real thing. It won't be long, the sceptics say, before the investment banks are fighting like cats in a bag. The concept of stock exchanges mutually owned by their users is a curiously old-fashioned one, singularly badly placed to deal with the often conflicting demands of users and fast changing technologies. This is a powerful threat to traditional stock exchanges, but as in the US where similar, competing electronic trading platforms have been introduced, it is probably not their death warrant.

Inflation: a question of rising expectations

Good news. The inflation rate as targeted by the Bank of England has been held in check, confounding the forecasters and saving the Governor from the humiliating prospect, all too real just a few months back, of having to write a formal letter of explanation to the Chancellor.

Bad news. The real rate of inflation, as experienced by the rest of us, is still warming up nicely, and at 3.7 per cent, is now at its highest level in eight years. Most of us would be forgiven for thinking that even this latter rate of inflation doesn't truly reflect the growth in our cost of living. Rightly or wrongly, there is a growing perception that prices are rising much more swiftly than official measures show. Not unless you are buying a new car, computer, or flat-screen TV, do you notice that some prices are falling. Unfortunately for the policymakers, these are not regular purchases.

Yet even the Bank must be cognisant of these higher rates of inflation. Unlike the targeted CPI measure, the RPI takes account of higher housing and mortgage costs. As a consequence, it is this measure that will ultimately determine inflationary expectations. The RPI is also the measure used for pay bargaining purposes. Interest rates have further to rise yet.

Acambis: last in a two-horse race

Winner takes all. For the loser, on the other hand, the consequences were brutal. Failure to win a $1bn US government contract to supply a new smallpox vaccine caused the Acambis price to plunge nearly 40 per cent yesterday. Shares in the winner, the Danish biotech Bavarian Nordic, were the mirror image, soaring nearly 30 per cent. Yet the decision was not quite so unexpected as it might seem. The Acambis share price has been in decline almost ever since it won the first vaccine contract in the aftermath of 9/11. Rightly, as it turned out, the market sensed it was being outrun in the race for the successor, weaker dose vaccine. For a while there, Acambis was that unique thing, a biotech with a big revenue stream. Now it is just another cash consuming biotech again.

j.warner@independent.co.uk

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