No crash but equities are in for a rough ride
COMMENT: `For a moment, it looked as if fear was getting the upper hand. A mere statistic was enough to lead to a dramatic change in perceptions about which way interest rates in the US are heading'
Tuesday 12 March 1996
For a moment there, it looked as if fear was getting the upper hand. A mere statistic - the US equivalent of our own unemployment figures - was enough to lead to a dramatic change in perceptions about which way interest rates in the US are heading. More cuts had been confidently expected, further fuelling this extraordinary bull run in equities. Now, with the US economy apparently heading for overkill, the expectation has swung 180 degrees; the next move will be up, not down, everyone is saying. Disaster - well, on Friday at least. With a weekend to sleep on it, the pundits are now not so sure. Wall Street was like a yo-yo yesterday, not knowing which way to go, and the situation looks harder to read than ever.
For what it is worth, here is the bear case for London equities. Let us assume that US interest rates are at the very least now on hold with the likelihood being that their next move is upwards. Despite the pause for breath yesterday, that cannot be anything other than bad news for US Treasury bonds. If they go lower, gilts will go lower too, for bond markets are global nowadays and tend to move in tandem so that national differentials are maintained. Given that London equities are already expensive relative to gilts, any adverse reaction in gilts is going to cause shares to tumble.
Kenneth Clarke, the Chancellor, wants to see at least another half-point fall in British base rates. He believes that this is not only possible but also justified by the data. In the past he has been lucky and things have swung his way. Increasingly isolated in the Cabinet over Europe, his luck may now be running out. It is going to require an extraordinary and wholly unforeseen change in international and domestic economic conditions for him to justify that extra half point. Enfeebled though the Bank of England might be, the Chancellor is not going to be allowed to get away with it.
The other factor that has been holding up the London equity market, takeover fever, is also fading fast. There are still plenty of deals in the offing, but there is also a great deal of hesitation. Unsettled markets - worse, markets that could fall heavily - are a bad backdrop for deal-making. Political uncertainty is adding to the "wait and see" mentality. Who knows when the general election might be, but the odds are fast shortening on the autumn and if that is the case, there are not going to be any big takeovers after May.
All things considered, then, things do not look good for London equities, not good at all. Wall Street's mini-correction should not be written off lightly. It seems unlikely that we are heading for a crash similar to the one that afflicted world markets in 1987, but this year's bull market certainly looks to be over.
All the high street in a hypermarket
Petrol, Post Offices and now Sketchley dry cleaners. The big supermarket chains, in their search for new lines and sources of profit, continue their assault on the traditional preserve of the high street.
As it retrenches, with the closure of 160 branches, Sketchley is expanding out of town by opening an unspecified number of branches in Sainsbury supermarkets. Presumably it is only a matter of time before betting shops, travel agents, estate agents, and building societies are all there too, available at your local hypermarket. Why, it cannot be long before we are all nipping down to Sainsbury's for a pint as well.
The decline of the high street and the ever onwards and upwards march of the big supermarket chains is a long established trend, but we are surely witnessing something new here. In part, it is the decline of the high street brand name. Sketchley still has an upmarket ring to it, but on the whole it is perceived as just another bog-standard dry cleaner, to all intents and purposes indistinguishable from the one next door. But it is more than that. In an increasingly competitive world, it is also about the need to share costs and overheads. Furthermore, purveyors of specialist services need to go where the customers are. These days it tends to be the supermarket, not the high street.
Small businesses are a big election issue
Michael Heseltine, champion of small firms in his competitiveness drives when at the Department of Trade and Industry and now the Cabinet Office, was a distinguished absentee from yesterday's small business conference in London to launch a package of new policies for the supposed benefit of the entrepreneur. This perhaps was not too much of a surprise, since he would have risked a barrage of questions from the floor about his own admission that he had been a bad payer in his early business career.
But leaving aside Mr Heseltine's embarrassment at losing the initiative on an issue dear to his heart - the competitiveness of small firms - the real significance of yesterday's package was not the individual measures. It was the fact that the Prime Minister has taken over presentation of the policy.
According to a DTI minister, Mr Major's interest had an immediate impact inside Whitehall, where log-jams started breaking. The most obvious example was his insistence that another look should be taken at enforcing disclosure by large companies of their late payments record. Only a few months ago, employers had successfully shot down this proposal and persuaded the Government to accept the second-best option of publication of companies' payment policies.
The statutory instrument enforcing disclosure of corporate policy went through the Commons only in January, but already it is looking out of date. Policy is one thing, practice often quite another. The policy statement compromise always did look unsatisfactory.
Most of the new measures for small firms, including those on late payment, are far from final decisions and must go out to consultation to see if they will work. But whereas in the past this formula has more often than not been a prelude to shelving anything remotely controversial or difficult, the Prime Minister's involvement tells a different story.
Small business is becoming an election issue, because of its impact on growth and the large number of jobs it creates. Next week, Tony Blair is to introduce a Labour conference on small business at which many of the personalities at Mr Major's jamboree will resurface, along with their shopping lists for government action.
Anybody with a decent idea for improving the lot of small business will be pushing at an open door over the next few months, as the two parties try to outdo each other. In the policy field, small businesses have never had it so good.
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