Outlook: Barclays

THERE CAN be few more telling illustrations of the present "flight to safety" among investors than the news that Abbey National overtook Barclays in terms of stock market value earlier this week, albeit briefly. This despite the fact that Barclays is set to make around a third more in profits than Abbey this year, even after its pounds 250m Russian disaster.

Never mind that Martin Taylor's mea culpa over the bank's Russian exposure has been generally welcomed by analysts in the City as a refreshingly honest piece of realism. Never mind also that Goldman Sachs, Morgan Stanley and SBC Warburg all rate the stock a screaming buy. Despite it all, the fund managers just do not want to know. They'd rather have safe as houses Abbey National, and other former building societies, in their portfolios than recession exposed Barclays.

The logic of this position is not hard to grasp, though it does at this juncture look more than a trifle exaggerated. A mortgage book is high quality, high margin lending which even in a recession tends to remain remarkably immune to bad debt experience. Barclays by contrast, is bound to see a very considerable pick up in bad debts in the event of a recession, not withstanding the risk averse credit controls Mr Taylor claims to have put in place during the good times. The Russian provision is just a foretaste of what's to come, say the jeremiahs.

Like most chief executives confronted by a plummeting share price, Mr Taylor is perplexed and just a little angered by the judgement of markets. There'll have to be a quite serious recession to justify this reversal in fortunes. And even though things are beginning to look worse by the day, no credible forecaster is yet predicting an outright recession at all.

Unfortunately, financial markets are driven as much by sentiment as rational analysis, and undervalued though Barclays might now be on conventional measures, nobody's in the mood for buying. About the only people who see value in the market as it stands are the chief executives themselves. Companies as diverse as NatWest and BTR bought back shares yesterday. They are just the tip of the iceberg. Billions of pounds have been spent on share buybacks so far this year. It can reasonably be argued that without the buyback prop, the market would be even lower.

Let's hope that the judgement of chief executives proves better than that or ordinary investors, for if they are wrong and there really is a worldwide recession on the way, there are going to be an awful lot of undercapitalised companies out there by the time they realise the bear market is for real.