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"
Thursday 07 September 1995
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.
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