Ebullient Footsie risks the return of the bears

COMMENT: "Those who might reasonably think that poor industrial production should presage a fall in share prices because they point to slowing growth, even recession, don't know nuffink"

Stock markets rarely behave in an entirely rational and logical manner. Nor, with markets, is the past any kind of guide to the future. If there is an explanation for this, it is because markets are driven by sentiment and psychology as much as anything else, and there's no accounting for the collective mood. However, that doesn't stop the pundits who make their living predicting the movement of markets from finding a logical explanation for every twist and turn. So it was yesterday, as the FT-SE 100 index rose to a new closing high, spurred on, in part, by what can only be described as extremely disappointing industrial output figures.

Those who might reasonably think that poor industrial production should presage a fall in share prices because it points to slowing growth, even recession, don't know nuffink. What a drop in industrial production actually means is the possibility of lower interest rates, this rather implausible line of reasoning goes. That's good for gilts, which in turn is good for equities. Well, that's one explanation for the rise in share prices. A more sophisticated version of the argument goes something like this. True, the figures were bad and to the extent that they define policy, they argue heavily in favour of a cut in interest rates. Certainly Eddie George's case for a rise in rates is dead and buried.

But in truth things are not all that bad and there is little chance of recession. While manufacturing output is weak, the rest of the economy is going great guns. The prospect of tax cuts in the Budget, the working out of previous deflationary measures and the money being pumped into the economy through building society takeovers, should support continued growth at a reasonable level - even if the export-led recovery that has sustained the statistics for so long is running out of steam.

It is just possible to buy this explanation. Combine it with takeover fever, a high level of investor liquidity - partly caused by the burgeoning number of cash takeovers - and the ever-upwards march of Wall Street, and it is easy to see why London should continue in such an ebullient mood.

As this column has argued before, however, share prices in Britain remain highly vulnerable to any setback on Wall Street, where valuations are now at unprecedented levels. Furthermore, they have not yet factored in fully the likely defeat of this government at the next election. While this might still seem distant, a badly judged Budget will revive what for markets remains the deeply bearish spectacle of Labour Party rule. When sentiment turns, it turns fast.

Anything sells if the price is right

The lesson of the last decade is that it is possible to privatise virtually anything - even the grotty old dregs of British Rail - provided the price is right. The railways might seem like the messiest, most complicated and unsatisfactory privatisation of all time, but that does not mean it is not going to happen.

Look at water, which seemed unsaleable in the months before the flotation - until Labour politicians were leaked secret documents showing a healthily rising stream of dividends. They thought they had found a scandal, but they unintentionally helped convince the City to buy.

There is a parallel now with Railtrack. Labour's predictions of disaster may be grabbing the headlines, and may even be right, but the mood of the City becomes decidedly more receptive with each devaluing horror story.

Yesterday's profit figures were a defining moment. In part this was because Bob Horton, Railtrack's sometimes overly excitable chairman, managed to get through the results presentations without putting a foot wrong, dispelling the worst fears of some of his advisers. But the figures themselves also looked as if they could become the basis of a realistic prospectus.

The first annual results from Railtrack since it was separated from British Rail showed an operating profit of pounds 305m and a pre-tax profit of pounds 189m. That is not much to show for a business with fixed assets of pounds 4.28bn but the profit was after a valiant effort to claw back the pounds 140m cost of the signalmen's strike and a pounds 46m charge for the cost of privatisation so far. Adding back those costs is alone enough to double the underlying pre-tax number. That holds out the possibility, if not yet the promise, of a steadily rising utility-style dividend after privatisation.

This is a business whose income from contracts with the train-operating companies is largely fixed by the regulator until the beginning of the next century. The scope for profits and dividend growth will therefore be from lowering costs, and one set of results is not enough evidence to go on. As for where the money comes from - largely state subsidies for a "privatisation" which is nothing but recycling of taxpayers money - the City doesn't care a fig, provided it is adequately underwritten by legally binding commercial contracts. Mr Horton is confident that the flotation could happen next spring if the Government wants.

Investors may not be quite so sanguine, but whether the sale is eventually slotted in for spring, summer or autumn, the first set of figures provides a good starting point.

When an inquiry is not an inquiry

Faced with allegations of impropriety or worse, setting up an inquiry carries the smack of a credible and concerned response. But the real motives, as time-honoured tradition tells us, can often be very different. For there is nothing better than a well-managed inquiry, suitably dressed with the trappings of impartiality, to obfuscate, evade and even apply large dollops of whitewash. The more controversial and publicly sensitive the issues, the more essential it is that the findings of an inquiry are seen to have emanated from a truly independent source.

Lloyd's of London has chosen to ignore this rule, just as the Bank of England did over Barings. In the same way that the self-styled independent inquiry into Barings was devalued by the perception that this was an investigation of the Bank by the Bank, so Lloyd's' dismissal yesterday of allegations of a ruinous cover-up of the dangers of asbestos liabilities can only be half convincing since it is based on an inquiry that Lloyd's commissioned and paid for.

Freshfields, the City law firm, may have done sterling work, but the fact remains that it was hired by Lloyd's to look into long-standing allegations that unknowing Names were still being taken on to syndicates in the late 70s and early 80s - at a time when insiders were already aware of the ruinous losses that would be clocked up on asbestos policies in the US.

If Lloyd's hoped that the report would clear the air, it has not. Even more bizarre, Lloyd's insists that its rejection of the allegations does not mean it is against an independent inquiry should new evidence emerge. In that case, why not hold a real independent inquiry and be done with it.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific