Outlook: Stock market struggles with Labour blues

Movement at Shell; Middleton's logjam
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The Independent Online

The stock market is a better barometer of underlying economic performance than most, so the fact that the FTSE 100 is hardly any higher today than it was when Labour came to power seven years ago should make us sit up and take notice. OK, so there has been a mega bear market of global proportions in the meantime from which equities have failed fully to recover.

Nonetheless, Britain's stock market performance has also been a great deal worse relatively than most other developed countries. Even the tired old German DAX managed a 17.3 per cent rise over the same timeframe, while the French CAC 40 was up 42.1 per cent, the Dow Jones Industrial Average was up nearly 50 per cent, and the Italian BCI rose a mouth-watering 72.4 per cent.

One possible explanation for this underperformance is the way solvency rules forced pension funds and life assurers to dump equities wholesale as the bear market began to bite, causing a downward spiral in prices from which they have been slow to recover. Some of the same thing happened on the Continent and in America, but not to the same degree, and in any case, savings institutions on the Continent tend not to be as heavily exposed to equities as they were in Britain.

Yet this doesn't properly explain the difference in performance. Valuations today are exactly the same as they were seven years ago. If the underperformance had been caused by a semi-permanent reduction in weightings, then you would have expected valuations to fall too. The really worrying feature of the British market's underperformance is that it is more than justified by the fact that both earnings and dividends have shown virtually no growth over the past seven years either, in marked contrast to almost everywhere else.

In a pamphlet for the Centre for Policy Studies, the right-leaning think-tank, John Littlewood, a former City analyst, attributes our sluggishness to an overdose of tax and spend in combination with an ever-growing mountain of meddlesome regulation. By coincidence or otherwise, other periods of Labour rule have also been marked by chronic stock market underperformance.

Mr Littlewood finds the connection impossible to ignore. Labour, he concludes, has a fundamental problem with the concept of profit. New Labour might pay lip service to the wealth-creating powers of capitalism, but at heart, it's no different from its Old Labour predecessors. In its desire to redistribute and regulate, it undermines private enterprise and profit.

Is Mr Littlewood correct? Up to a point I think he is, but he exaggerates his case. The drivers of stock market and corporate performance are many, varied and complex, and it's just plain silly to regard stock market performance as entirely determined by public policy. Some part of Britain's underperformance is more than likely explained by inferior management. The herd-like mentality of many British fund managers may also have resulted in misallocation of capital.

Mr Littlewood attributes a large part of the problem to the rash of regulation spreading out from Brussels, yet this doesn't appear to have done any harm to the Italian, Spanish or even French stock markets. Indeed, the fact the French stock market has outperformed the British one by 40 per cent during a period in which France introduced a 35 hour week makes a mockery of the Littlewood analysis.

Even so, he's right on at least one thing. As Mr Littlewood recognises, the paradox of Britain's lacklustre stock market is that our economic performance under Labour as judged by GDP growth has actually been rather good. There is a mismatch between the Government's assessment of its management of the economy and the verdict of the stock market. Over the last seven years, Britain's growth rate was around twice that of Germany and Italy. It was also quite a bit higher than that of France. Yet this hasn't been reflected in the overall earnings of publicly quoted companies. Instead, growth is being supported by debt fuelled consumption and public spending.

The stock market has gone nowhere, but house prices have more than doubled. This makes us feel wealthier, allowing us to borrow more, even though no extra wealth has been created. As Warren Buffet has observed, one of the problems with investment is that we tend to be instructed by what we see in the rear view mirror rather than what's on the road ahead. Britons have given up on the stock market because recent experience dictates you cannot make money out of it.

Instead, we pour everything into housing, which cheap credit seems to have made a dead cert. Eventually house prices will peak and correct. People will feel compelled to rebuild their savings, which in most cases are lamentably short of that required to pay for a decent old age. Maybe then the stock market will outperform again, only it won't have much to do with who's in government.

Movement at Shell

Like a supertanker in mid-ocean, it takes an awfully long time for a bureaucratic monolith such as Royal Dutch/Shell to change course. But yesterday it showed the first signs in months that someone may actually have their hand somewhere in the rough vicinity of the tiller. The share buy-back was a no-brainer for a business gushing cash on the back of $34 oil. The decision to run the company for value not volume is also a step in the right direction.

Shell is even beginning to grasp the rudiments of what makes for good communication. A week ago the company was in an agony of indecision over whether to put the acting finance director up to speak to journalists and analysts about the first quarter results, which, incidentally were in some respects better than those posted by BP three days ago. To everyone's relief, he was eventually fielded, along with the chairman Jeroen van der Veer and the head of exploration and production, Malcolm Brinded, the one man who has looked in charge of his brief as the sorry saga of the missing reserves has unfolded.

Yet Shell is scarcely headed for calmer waters. The threat of criminal charges from the US Justice Department looms large, and who knows what damage the former chairman Sir Philip Watts could wreck on the current board if and when he chooses to break cover.

The new strategy of focusing on projects which offer a short-term payback may buy off investors for now. But it does not provide a solution to Shell's underlying problem, which is that for a very long time it has failed to replenish its reserves at the same rate as its competitors, even with the "leave no stone unturned" approach of its former chairman. In the short-term Shell will flatter to deceive as those 4.35 billion barrels of unbooked reserves are added back to the proven category. Yet as we all now know, Shell's motor is running with the tank only half full.

The company has yet to convince the outside world than it can drag itself into the 21 century. For all the new chairman's promises to accelerate the review of corporate structure, it remains far from obvious that the Royal Dutch half is as keen as Shell Transport and Trading on a unified board. The supertanker is turning, but it may take an awfully long time to show.

Middleton's logjam

Sir Peter Middleton, chairman of Barclays, was his usual sprightly self at yesterday's annual meeting, batting off questions with customary charm, wit and dexterity. It must be his Treasury training. None the less, quite a few shareholders must be wondering what he's still doing there. Sir Peter, who turned 70 this month, loves the job, and would have gone on forever if he'd been allowed. Matt Barrett, the chief executive, eventually had to threaten to resign and go back to his native Canada to get Sir Peter to set a retirement date. Ungraciously, Sir Peter tried to block Mr Barrett's elevation to the chairmanship. As it is, Sir Peter is planning to hang on in there until the end of the year, creating a logjam of movement during which not very much can happen. Sir Peter should have the wisdom to go early, and let Barclays move on.