Jeremy Warner's Outlook: Markets are relearning a painful lesson - mispricing of risk will damage your wealth

Hanover rides to the rescue of SMG; Forte finally joins that big hotel in the sky; M&S gaffe forces Sainsbury statement
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The Independent Online

So that's it then. Seemingly everyone is in agreement that the setback in markets over the past two days is just a "healthy" mid- cycle correction, rather than the start of a prolonged bear market.

This is no doubt the way to bet, yet it would obviously be just plain daft to write the whole thing off as of no long-term significance at all. The present bout of nerves is far from over yet, and if there is one thing that it has highlighted it is the degree to which, in a world awash with cheap money, large elements of financial risk have become quite severely mispriced.

This is part of a pattern that tends routinely to occur at this stage of the cycle. As the good times roll, investors become increasingly oblivious to risk, and, in a process that Wall Street bankers sometimes call "reaching for yield", take on ever more extreme versions of it in their search for a decent rate of return.

Emerging market debt, sub-prime mortgage lending, interest rate arbitrage, no-hope business ventures - you name it, everyone is chasing if it seems to offer even just a little bit more than Treasury bonds. The phenomenon also explains the explosive growth of private equity and hedge fund finance. Both claim to offer superior rates of return, so everyone pours in. That they can only deliver these superior rates of return by taking on much higher levels of risk seems to get ignored in the scramble.

David Rubenstein, head of the private equity house Carlyle Group, referred to it as "bubble amnesia" at the Super Return private equity conference in Frankfurt yesterday. "I don't think we are in a bubble similar to the tech bubble of 2000", he said, "but declines will occur. We can't go on like this forever... returns will be lower, a downturn will occur."

Scary stuff, but he is plainly right. Stock markets in developing economies have, up until quite recently, nearly always traded at a big discount to those of mature Western economies, despite supposedly superior growth prospects.

Today, many of them are at a significant premium, despite poor corporate governance, inadequate standards of disclosure, rotten banking systems and sometimes unstable political regimes. The same goes for emerging market debt, where spreads have been eroded to virtually nothing.

A huge amount of excitement surrounds the development story of China and India, with good reason in many respects. Yet the investment forces this excitement drives are the equivalent of the technology bubble of the late 1990s.

Despite the hype, it is as well to remember the old definition of an emerging market as one from which it is impossible to emerge in a crisis. The correction in Chinese stock prices demonstrates the continued relevance of these old truisms.

Hanover rides to the rescue of SMG

That's shareholder activism for you. SMG, owner of Scottish TV and Virgin Radio, has been rudderlessly drifting along for years now, but, although investors have succeeded in removing both a chairman and a chief executive, they've failed to fix the problem.

Now along comes Matthew Peacock's Hanover Investors, a turnaround boutique, to clean out virtually the entire board and install its own man, Rob Woodward, a former commercial director of Channel 4, as chief executive. Mr Woodward, has been touting himself around for the SMG job for ages but, until Hanover emerged with a 12.6 per cent stake, he'd failed even to have his phone calls returned.

Instead, the SMG board had gone cap in hand back to UTV, the Ulster television company, to see if earlier merger talks could be revived. Insultingly, UTV said that they could, but only on terms lower than the original. Due diligence uncovered a difference of opinion over the size of the SMG pension deficit.

In any case, the bigger of the two companies was heading for a deal where it would be forced to accept a minority of the combined equity. If there is recovery potential within SMG, more than 50 per cent of it would have gone to UTV. The Hanover approach seems a better solution all round.

The mystery is why the previous chairman, Chris Masters, and his board were so resistant to the idea. Hanover has an impressive track record of turnarounds, including 4Imprint, Elementis and Renold. Whether it can succeed with traditional broadcast media, which faces massive structural challenges, is an interesting question. Yet it is hard to see how it can do any worse than the last lot.

Forte finally joins that big hotel in the sky

Lord Forte, who has died at the age of 98, was very possibly the last surviving member of the pre-war generation of great British entrepreneurs. He began as far back as the mid-1930s, with a Regent Street milk bar..

The company he founded, Trust House Forte, has long gone, torn to shreds by Gerry Robinson's Granada Group after a bitterly fought takeover battle in the mid-1990s, but many of the names with which it was associated - the Cafe Royal, Travelodge, Posthouse, the Grosvenor House, Little Chef, and Happy Eater - live on. Rather more dubiously, so does the motorway service station, possibly Lord Forte's single most important cultural contribution to the British nation. He opened the first of them, at Newport Pagnell, in 1959.

During THF's eight-year battle for control of the Savoy, the motorway connection became the butt of one of those pricelessly snobbish remarks which periodically emanate from the inner ranks of the British establishment.

Confronted by the THF bid, Giles Shepard, then managing director of the Savoy, opined: "On professional grounds, we have never thought that a vast combine like Trust House Forte, which among other things runs service stations on the main arterial roads and airport catering, is at all suitable to run services of the quality of the Savoy, Claridges, the Connaught and the Berkeley."

The irony was that, by the time THF fell prey to Granada, it was Lord Forte who was the establishment and the "upstart caterer" Gerry Robinson who played the role of asset-stripping outsider prising his way in.

When the thorny issue of the succession arose, Lord Forte insisted on anointing his son, Sir Rocco, despite the fact that by then the family shareholding in the company was comparatively small.

Rocco has since proved himself a highly accomplished hotelier by rebuilding a considerable privately owned hotels group, but at the time the City saw red over the apparent nepotism of it all, and, when Granada launched its bid, he never stood a chance. On the day Sir Gerry Robinson struck, Rocco was out grouse- shooting on a Scottish moor. His lack of preparedness wrote the script for his subsequent defeat.

As for Lord Forte, what a life, spanning as it did virtually an entire century.

M&S gaffe forces Sainsbury statement

Stuart Rose, chief executive of Marks & Spencer, was only stating the blindingly obvious when he told a Retail Week conference yesterday that since Sainsbury was in play his shareholders would think him an idiot if he wasn't considering making a bid. Indeed it would be odd given M&S's position as the number-four player in the UK food retailing market.

Yet it is not the sort of thing chief executives are supposed to say publicly and he's been forced to pay handsomely for his gaffe. Frantic consultations with bankers, lawyers and the City Takeover Panel resulted in a statement saying M&S had no intention of bidding at the present moment.

This puts the company offside for the next six months - except if the private equity consortium which has already declared its hand makes a bid in the meantime, in which case M&S is free again to enter the fray. I'm not sure how much further all this takes us.

j.warner@independent.co.uk

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