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
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
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

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003