It won't get interesting till after the election

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The Independent Online
A General Election is called, the economy booms, the stock market slumps and a nation yawns. The City has rather taken the view that if a week is a long time in politics then six weeks is an eternity. Traders have been doing their best to generate some interest in matters political. The FT-SE 100 Index of leading shares fell by nearly 4 per cent last week in quite heavy volume. Traditionalists would like to blame uncertainty caused by the election. A more rational explanation for the activity was the spectre of higher interest rates and the approach of the end of the tax year.

Unlike the mood in the markets five years ago there is no great sense of despondency about the prospect of a Labour government. In City eyes a change of government was as certain in 1992 as it is this year. Last week, however, the gossip was not about life under Labour but what kind of majority the new prime minister would have to work with.

Only time will tell whether this complacency is justified. For the time being, however, both City and industry are prepared to accept the assurances that the economy will be managed prudently. This allows the markets to focus on real events rather than some hypothetical interpretation of the future. Hence the concerns about a rise in interest rates. The strength of the economy reported last week confirms suspicions that UK interest rates will have to rise after the election, whoever wins. With US rates expected to rise next week to pre-empt any overheating of the American economy, pressure for a British hike will increase.

If the market's thinking about prudent economic management from a Labour government is correct then it will also have to overturn further conventional wisdom. Notably the construction industry, a traditional beneficiary of increased Labour public spending, will have to settle for a quieter lifestyle. This week sees a number of those companies reporting. Their comments on the outlook under New Labour will make interesting reading.

The real problem for the market is that it cannot know quite how a Labour government will behave. The pre-match publicity has been extremely positive but it is how the game is played that really counts. If politically inspired market gyrations are to come, they will be after the election and not before.

Coughing up

The decision by Liggett, the smallest of the US tobacco giants, to try and strike a deal with those who have been pursuing it in the US courts has been characterised as a devastating blow for the industry. The anti- smoking lobby may be keen to view Liggett's move in those terms but the reality is rather different. Liggett is not the catalyst for a crushing defeat of the tobacco industry but a victim of a concerted move by the cigarette manufacturers to finally put an end to the constant harassment that undermines shareholder value.

It is more than coincidence that one by one the big tobacco companies have, over the last few months, accepted quite openly that they would be prepared to settle the legal disputes once and for all providing this was in shareholders' interests. Suing tobacco companies has become a quite productive industry. It costs BAT, for instance, around $100m a year in legal fees to fight such cases. It has already handed more than 12 million documents to US courts. Then there is the damage done to share prices by the constant round of lawsuit-related news stories. Hardly a week goes by without some US court delivering a dramatic setback that will be overturned months later. This rollercoaster is extremely unhelpful for share prices.

It is hardly surprising, then, that the big tobacco players are quietly seeking a solution. It would require an industry consensus and federal government leadership. Negotiations would be complex and time-consuming.

The suspicion in the industry is that Liggett's move is something of a pre-emptive strike to force one of the other players to buy it out. Do not forget that the company has tried this tactic before and failed. Also bear in mind that from what is known about the settlement it still leaves a number of important court cases against Liggett outstanding. No one knows for sure what documents Liggett is threatening to hand over to the authorities. The chances are they are not quite as damning as some believe. The biggest threat from the Liggett settlement is that it breaks the private consensus needed for a federal and final settlement.

Liggett might secure the takeover bid the rest of the industry thinks its wants because the chance of bringing the litigation circus to an end is not one the industry wants to lose. The tobacco industry may be preparing to cave in, but on terms that are far less damaging than the Liggett settlement suggests.

Tangled wires

This week should see the formal but complex offers that will pave the way for the creation of Cable & Wireless Communications, which promises to be a potent force in the multimedia world. It brings together the telephony of Mercury and the UK cable interests of Nynex, Bell Cablemedia and Videotron. The company is unlikely to be fully operational until the second half of the year, so all that can be admired now is its potential. The theoretical attractions of the grouping are considerable. The linkage of Mercury's telephone networks with the infrastructures of its cable partners provides a powerful alliance that seems ideally placed to seize the opportunities presented by rapidly evolving technology. Cable television, interactivity and telephony will combine to offer customers the full range of multimedia services.

Whether that is what the customers want remains to be seen. There is just a danger that C&WC will represent a multimedia agglomeration which is just too little too late. If the network computer takes off, as it threatens to do, then C&WC may be relegated to the role of a minor telephone company, which is pretty much where Mercury has been for some time.