Investment: Foreign fortune-hunters fuel non-Footsie sparkle

No Pain, No Gain: Our Man's Portfolio
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INVESTORS SHOULD be encouraged by the stock market's performance in the first half-year and its exuberance in the opening weeks of the last six months of this millennium.

Footsie constituents and the mid-cappers have stretched to new peaks and the small cap index has hit highs for the year. And the revival in the fortunes of non-Footsie shares is the undoubted highlight of this year's proceedings.

Indeed the rarely mentioned all-small share index, which embraces the small-cap and fledgling indices, shows conclusively just how dramatically the small fry have recovered. In November last year the newly created all-small measurement, by far the best record of the strength of the undercard, was at a 991.35-point low; it is now riding at a 1,555.53 peak.

Last year the stock market seemed to have lost faith with almost every share outside Footsie as blue chips soared to record levels and the rest of the herd bumped along in deep despair. It was a market of the loved and unloved. Such was the plight of the neglected tiddlers that even Westminster started to express concern.

For months small caps were ignored by most institutional investors. They said they had difficulty dealing in them - because it was all too easy and much more profitable to trade in major shares.

More of the shares that were then unfashionable, such as engineers, lurked on the undercard and there was no doubt the more difficult economic conditions, aided and abetted by the strong pound, seemed to cause more damage proportionately to the smaller players.

But the pendulum inevitably swings too far. Overseas companies noticed the bargain-basement small-cap share ratings and began to queue up to launch cash bids. And managements saw their chance to buy their companies on the cheap, having little difficulty encouraging venture capitalists to back cash offers.

Slowly, institutional investors woke up to the undoubted value lurking on the undercard. And with private shareholders, who had continued to support the small cappers through thick and thin, remaining loyal an exhilarating re-rating occurred. The small-cap resurgence is good for the market, which needs a strong undercard to encourage overall well-being.

I remain optimistic about the rest of the year. With the usual proviso that the world avoids any major upset, and Wall Street keeps its nerve, I expect blue chips and the rest to continue to make headway. One worry, is the apparent run-down of institutional cash piles which, of course, weakens the "wall of money" case for equities.

Still, institutions remain equity-hungry, encouraged by mega mergers and seemingly improving earnings. In many cases, holdings of government stocks are being cut to accommodate share purchases. Share buybacks, reducing the pool of shares and pumping cash into the system, also support the bull case. The tendency to exchange equity for debt through buybacks may, in the longer term, create problems. But at the moment debt is cheap, so why not take advantage of the low- interest phenomenon? And when it comes to calculating earnings per share (eps) the advantages are obvious for the shareholder and, perhaps more importantly, for directors and others with benefits geared to a company's eps.

I can see no reason why the frenzied level of corporate activity should decline and there is a distinct possibility it will increase. Clearly, the world has fallen in love with the cross-border style of take- over, highlighted by British Petroleum and Amoco, and Vodafone and AirTouch. Although the headline action will be confined to Footsie constituents, I suspect there will be a high degree of activity on the undercard.

My portfolio has already felt the heat of merger mania. Allied Domecq and its suddenly much-desired chain of what most regard as under-achieving pubs, have allowed its shares to outperform, probably for the first time.

And Montana, the fledgling restaurant group, has signalled a bidder is circling. While talks take place the shares of the portfolio's only Ofex (fringe market) member are suspended at 257.5p. They were tipped at 182.5p. The group, which recently raised pounds 960,000 through a placing with three institutions at 200p, is opening its sixth restaurant - this time at Wimbledon.

Global, the food group, is the other portfolio constituent to indulged in corporate action, bidding successfully for Sims Foods, the burger-maker. The deal has gone down well with Global shares at 25.5p nudging their year's high. Recommended at 20p. They were 9.5p earlier this year.