Jeremy Warner's Outlook: Bar is raised further for the London Stock Exchange as Nasdaq snaps up 15% stake

Metal prices: super cycle or bubble?; Marks & Spencer's comeback story
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The Independent Online

There appears no end to the re-evaluation of the London Stock Exchange's true worth. Many investors gulped hard when the LSE board sent Nasdaq's Robert Greifeld packing at £9.50 a share. The 580p offered just a few months previously by Macquarie Bank of Australia was plainly an absurd under valuation, but £9.50 seemed at least worth talking about.

Clara Furse and her fellow directors were fully vindicated yesterday as Nasdaq returned to snap up Threadneedle's 13.9 per cent stake at an astonishing £11.75 a share. There will be some happy clients at Threadneedle today, perhaps not so happy at Fidelity, which sold down the bulk of its stake just a few months back at prices between 660p and 780p.

For the time being, Mr Greifeld calls his new investment "a very strategic purchase", whatever that means, but presumably he'll be back for more when the chance arises. The rules allow him to buy a further 10 per cent in seven days' time, followed by another cooling-off period at the end of which he can lift the holding to just under 30 per cent. Having publicly withdrawn once, he cannot bid again for six months except with the board's approval or in the event of a rival offer.

However, the effect of such a big holding so expensively acquired is to act as a powerful deterrent to others. With Euronext and the New York Stock Exchange still circling, we can only assume that's his medium-term purpose. The chess game among the world's major bourses continues.

Metal prices: super cycle or bubble?

There are only two views in the capital markets on commodities right now, or at least their metallic variety - bullish and very bullish. Gold and silver are at prices not seen since the early 1980s, copper at more than $6,000 a tonne is at an all-time high, and so too is zinc at $2,953 a tonne. Nickel and tin are also close to historic highs. Is this a bubble or, as most mining chiefs insist, is it just the "super cycle" going through its paces, with yet further price strength to come?

Support for the former view comes from the present tidal wave of purely speculative, financial buying of commodities. According to Michael Widmer, an analyst at Macquarie Bank, investment fund flows into commodities are already at £90bn, and with the present level of interest from pension funds and other financial players looking to diversify their assets, could easily reach $130-$140bn by the end of the year.

The backdrop is heightened international tension over Iran's nuclear ambitions and a weakening dollar. In such circumstances, gold is assuming some of its safe haven attributes. The effect is rubbing off on other metals too.

If commodity prices were to follow their traditional pattern, they would already be approaching their cyclical peak. In the past, prices have adopted an entirely predictable trajectory. As the good times roll and the world economy booms, prices rise strongly, encouraging producers to invest heavily in new sources of supply. These tend to come on stream just as monetary policy is tightened to choke off inflationary pressures, compounding the oversupply in any subsequent downturn in demand and causing prices to plummet.

The US Federal Reserve is in just such a tightening phase right now. Central bankers from Japan to Europe are all busy reversing the policy of loose money put in place after the terrorist atrocities of September 11. Yet so far there are few signs of the roaring bull market in commodities faltering. The biggest reason for thinking the stalling point may still be some distance off is the belief that we are in the midst of a "super cycle", where world demand is set to keep growing regardless of the brake pedal being applied by the Fed and other central bankers. Many of the fundamentals seem to support this view. There's no reason to believe that soaring Asian demand, particularly from China and India, is about to abate. To the contrary, relatively low inventory levels suggest it might even increase.

The bull case is underpinned by the fact that miners have been a great deal more disciplined than they have in the past when it comes to investment in new sources of supply. Many of the observations that are made about oil apply to the extraction of base metals too. The low-cost sources of supply are already being exploited, leaving miners to fall back on ever more costly projects in ever more environmentally sensitive areas for anything further.

As Merrill Lynch, the investment bank, observed in a circular yesterday, there is strong evidence of a definite structural shift in the cost base of metal producers going on; both the capital costs and the operating costs of new projects have increased significantly over the past five years. If the cost of supply is rising and demand remains strong, then consumers must pay more.

The caveat, as ever, is the state of the world economy. The present squeeze on money would normally result in a sharp slowdown. But there's little sign of it yet. Rather the reverse, in fact. One of the reasons market interest rates continue to be on a rising trend is that people's expectations of the present phase of growth have lengthened. Despite the economic imbalances, despite the international tensions, despite the unwinding in capital markets of some heavy exposures to the carry trade, and despite the slowing US housing market, the global economic outlook has rarely looked better.

Experience tells us it is at just such moments that the greatest peril lies. Well, maybe. There's always scope for the unexpected, but on current evidence, the Fed looks more than capable of engineering a soft landing in the US economy, and the long-term prognosis for the developing economies of Asia and elsewhere continues to look excellent. It may therefore still be too early to call an end to the commodities boom.

The very long-term outlook for base metal prices, however, is still poor to dismal. Commodity cycles have come and gone, but the long-term trend in prices in real terms has been relentlessly down for 200 years or more. Nor is this merely a result of the fact that until quite recently, the cost of extraction has been falling and the quantity expanding. Fact: post-industrial societies simply use a lot less base metal. Eventually this will happen to China and India too. Yet, in the meantime, the super cycle may have quite a bit further to run.

Marks & Spencer's comeback story

Stuart Rose, the chief executive of Marks & Spencer, still thinks it too early to declare the turnaround complete, and strictly speaking he must be right. The 6.8 per cent growth in like-for-like sales reported yesterday is sensational set against the performance of many rivals, yet the figures are up against particularly poor comparitors.

As Mr Rose says, we'll need to wait until January to see whether he's managed to sustain the recovery. The example of one of Mr Rose's predecessors, Luc Vandevelde, who ludicrously declared the M&S turnaround complete after just a couple of decent quarters, serves as a terrible warning. Mr Rose is not about to repeat the mistake.

Yet judging by the share price, which is beginning to approach the all-time high last seen as far back as 1998, the City has already made up its mind. Like it or not, Mr Rose is going to have to live with expectations which have pencilled in £1bn of annual profits for two years hence, again a level not seen since the late 1990s.

That said, he could achieve that result tomorrow by freezing investment and like private equity running M&S for cash. Instead, he's planning to invest up to £570m in the current financial year in pursuit of the "brighter, lighter, more contemporary" look he's introducing through out the group's portfolio of stores.

Directors made the right call in turning down Philip Green at £4 a share two summers ago. Their decision may even come to be seen as an historic turning point in the march of private equity. Stock market investors have since then proved ever more resistant to private equity's embrace.

Mr Rose may be reluctant to call the turnaround complete, yet he's plainly got the wind in his sales. He's even talking of reversing the company's ragged retreat from overseas expansion. Still, perhaps better to learn to walk again before trying to run.

j.warner@independent.co.uk

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