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
PROMOTED VIDEO
Arts and Entertainment
Sheeran arrives at the 56th annual Grammy Awards earlier this year
musicYes, that would be Ed Sheeran, according to the BBC
Arts and Entertainment
AKB48 perform during one of their daily concerts at Tokyo’s Akihabara theatre
musicJapan's AKB48 are one of the world’s most-successful pop acts
News
Ian Thorpe has thanked his supporters after the athlete said in an interview that he is gay
people
News
The headstone of jazz great Miles Davis at Woodlawn Cemetery in New York
news
Arts and Entertainment
Brendan O'Carroll has brought out his female alter-ego Agnes Brown for Mrs Brown's Boys D'Movie
filmComedy holds its place at top of the UK box office
News
newsBear sweltering in zoo that reaches temperatures of 40 degrees
Arts and Entertainment
Professor Kathy Willis will showcase plants from the Royal Botanic Gardens at Kew
radioPlants: From Roots to Riches has been two years in the making
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
TV The follow-up documentary that has got locals worried
Arts and Entertainment
Eminem's daughter Hailie has graduated from high school
music
Arts and Entertainment
Original Netflix series such as Orange Is The New Black are to benefit from a 'substantial' increase in investment
TVHoax announcement had caused outrage
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

News
One Direction star Harry Styles who says he has no plans to follow his pal Cara Delevingne down the catwalk.
peopleManagement confirms rumours singer is going it alone are false
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Information Security Manager (ISO 27001, Accreditation, ITIL)

£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Trade Desk Specialist (FIX, Linux, Windows, Network Security)

£60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

£35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

Day In a Page

Super Mario crushes the Messi dream as Germany win the 2014 World Cup in Brazil

Super Mario crushes the Messi dream

Germany win the 2014 World Cup in Brazil
Saharan remains may be evidence of the first race war, 13,000 years ago

The first race war, 13,000 years ago?

Saharan remains may be evidence of oldest large-scale armed conflict
Scientists find early warning system for Alzheimer’s

Scientists find early warning system for Alzheimer’s

Researchers hope eye tests can spot ‘biomarkers’ of the disease
Sex, controversy and schoolgirl schtick

Meet Japan's AKB48

Pop, sex and schoolgirl schtick make for controversial success
Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor