Outlook: Howard's end for the stock market or another sucker's rally

Corus meltdown; Barrett/Barclays  
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The Independent Online

ACCORDING TO Brian Winterflood the stock market is plunging in part because it senses a return to full-blooded socialism. Speaking on Radio 4's Today programme yesterday, the City veteran was apparently referring to what might happen if Tony Blair gets booted out because of his position over war against Iraq. His comments were strangely reminiscent of the depths of the bear market back in the mid-1970s, when City gents thought capitalism as they then knew it was coming to an end and in preparedness for the revolution to come began barricading the house and stocking up on baked beans and Scotch.

According to Brian Winterflood the stock market is plunging in part because it senses a return to full-blooded socialism. Speaking on Radio 4's Today programme yesterday, the City veteran was apparently referring to what might happen if Tony Blair gets booted out because of his position over war against Iraq. His comments were strangely reminiscent of the depths of the bear market back in the mid-1970s, when City gents thought capitalism as they then knew it was coming to an end and in preparedness for the revolution to come began barricading the house and stocking up on baked beans and Scotch.

Mr Winterflood has plainly been spending too much time in the Long Room, or now it's closed some such other City hostelry, for in the real world outside, the economy is close to full employment, inflation is in abeyance, living standards have never been higher, Britons take an average of two foreign holidays a year and house prices continue to soar.

Share prices are indicating that none of this is going to last, of course, but if it is the prospect of socialism that's driving the stock market, it was being given the benefit of the doubt yesterday, as shares clawed back all the previous day's calamitous fall and some. It's never a good idea to try to make political capital out of ups and downs of the stock market, as the Prime Minister learned to his cost last year by claiming that shares had grown hugely in value under New Labour.

It was wrong then and it is even more wrong today with the FTSE 100 now nearly a quarter lower than it was when Labour came to power on 1 May 1997. That hasn't stopped Michael Howard, the shadow Chancellor, wading into the debate to claim that the meltdown in markets is in large part the Chancellor's fault. To support his contention, he cites figures that show the London stock market has significantly underperformed the US market since Labour came to power. Even France has done better, while only Germany among his direct comparators has done significantly worse.

The Treasury would prefer you to look at peak-to-trough comparisons, which show that the FTSE 100 has fallen roughly in line with the S&P 500 and a good less than the Dax in Germany and the CAC 40 in France. The reason Mr Howard's figures are largely correct too is that the other markets rose much further during the boom, so when they began to fall, they were starting from a higher level.

Mr Howard is proving a gritty and effective foil in challenging the Government's often inflated and complacent claims about the economy, and he's right to highlight the almost criminal damage that the Government's removal of the tax credit on dividends has inflicted on the pensions industry. Dubya's tax cutting in the US stands in stark contrast to the investment unfriendly policies being pursued here.

In other respects, however, Mr Howard's analysis doesn't bear serious scrutiny. The FTSE 100 is largely made up of big global companies. Furthermore, it is disproportionately dominated by a relatively small number of industrial sectors. What's going on in the UK economy, if not irrelevant, is only a smallish part of the mix. For instance, the pressure on pharmaceutical prices in the US is an infinitely more significant factor in the plunge in the price of GlaxoSmithKline than the prospect of higher national insurance contributions in the UK.

Likewise, the reason why the proportion of pension funds held in UK shares has fallen from 53 per cent in 1997 to 39 per cent in 2002 is largely because share prices have declined while bond prices have risen. The growing maturity of many pension funds drives them into bonds in any case. Diversification into overseas equities is determined by long-term decisions about asset allocation rather than short-term doubts about the UK economy. I'm not trying to teach Mr Howard how to suck eggs. I'm sure he knows all this better than I do. But it does get my goat to see such a complex interaction of influences so ludicrously over simplified.

Corus meltdown

Like the cyclical business that it is, the British steel industry descends into crisis every decade or so, only to emerge phoenix-like from the ashes. Merging it with the Dutch and changing its name to Corus has changed nothing. Usually there is someone to point the finger at, like the comical Charles Villiers who was not known as Mr Pastry for nothing, or alternatively a saviour to pull the fat out of fire, like the rather more frightening Sir Ian MacGregor. Regrettably, the crisis now engulfing the Corus line leader, Sir Brian Moffat, is surely more terminal than any which faced his predecessors.

The UK carbon steels business looks endemically unprofitable, the money to fix it from the sale of Corus's aluminium division will not now materialise and the Dutch are agitating for a break-up so they can get their hands back on the few worthwhile bits of the group before they go down with the rest.

For all the huge strides made to improve the productivity of British steel, this is a commodity product which can be made more cheaply in too many other parts of the world, or substituted for using cheaper and lighter materials. British Steel is just the outrider for a whole swathe of manufacturing industry unable to compete in a fast globalising world. The next generation of materials, such as liquid metal alloys, will never be made in Britain at all.

As fast as the company closes down steel mills, its customer base continues to shrink. British Steel used to boast five integrated plants. Now Corus operates just three on these shores. Soon it could become two and even this may be one too many to keep UK capacity in line with Britain's dwindling manufacturing base.

With a market capitalisation of £125m and borrowings of £1.2bn, Corus is a busted flush which can neither buy its way out of trouble by raising new equity or easily persuade its banks to stump up yet more debt. The Government will, no doubt, wring its hands, shed a crocodile tear or two and put up some redundancy money. But European state-aid rules mean that an old-fashioned rescue is out of the question. Even if the Government were minded to open the tap again, it would not be allowed to.

Corus has presided over an heroic destruction of shareholder value since it was formed four years ago and the Dutch auction which now looms promises to rob investors of all that's left. Corus might still be lucky enough to attract a trade buyer, but finding one with so much capacity already going spare won't be easy. That leaves the possibility of a debt-for-equity swap. It might buy Corus more time, but in the long run it would do nothing to solve the crippling structural difficulties faced by this industry.

Barrett/Barclays

Matt Barrett, chief executive of Barclays, claimed to be genuinely surprised when announcing his results last month at the suggestion that he would soon be moving up to the chairman's office. "It's news to me," he said.

Well, Barclays would not presumably be canvassing the opinions of its shareholders if that wasn't its intention, and although Sir Peter Middleton is plainly loving his second career as chairman of Barclays, he surely won't be there for a great deal longer. Sir George Mathewson pulled off the trick at Royal Bank of Scotland, in moving from chief executive to chairman, though he had to fight like an alley cat to do so. Why not Mr Barrett too?

Derek Higgs, that's why. Yesterday Mr Higgs seemed to prepare the ground for a partial climbdown on the idea that chief executives shouldn't become chairman of the same company by specifically citing Barclays as an example of where it might be allowed. Mr Barrett seems to have it in the bag.

jeremy.warner@independent.co.uk

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