Pessimists ready to have their day

Are we in the dying days of a bull market? It certainly feels as if we are, as we enter the dog days of August, and torpor overhangs the market.

On Friday, following in Wall Street's footsteps, leading shares lost 1.5 per cent, or 76.9 points off the FT-SE 100 index, which closed at 4901.1. Although another substantial fall, optimists would point to the fact that the market eventually ended ahead of where it started the week, after the even more precipitous declines of the previous Friday.

Yet is it just Wall Street that should be exercising our minds? For the determined gloomster, there is plenty of evidence accumulating that things are not well. How else should we read the news that British consumer spending has reached its highest level in nine years. In the second quarter, consumer spending rose by 1.5 per cent - the fastest rate since the last boom of the mid-to-late 1980s.

This is, by any stretch, bad news for the medium term. Once again the economy seems poised to undergo the classic British phenomenon, boom to bust in three easy stages: consumers go spending-crazy as more money comes into their pockets, interest rates rise, and suddenly businesses and individuals find they cannot afford their loans. At least on this occasion, the politicians can say, up to a point, that they are not to blame. This time round, the money comes to a great extent from the conversion windfalls.

Even so, this is little consolation to the perennial gloomsters among us. A rosy period of expansion will prove unsustainable, blighted by rising interest rates and, in this instance, a strong pound. As one economist once put it, never underestimate the capacity of the British economy to disappoint.

Coming back to the market, it seems clear that consumer spending - and some other uninspiring economic data - is the real bogey for the stock market. It would be hard to imagine a clearer sell signal.

Last week witnessed some of the more determined share buying by company directors, as the board of Ulster TV piled into their stock. The reason is that the company is on the receiving end of a hostile bid from Scottish Media, owner of Scottish Television, and the Herald newspaper.

Between them, the directors bought 4.36 million shares at 210p - roughly 8.3 per cent of the company. No one could accuse them of failing to put their money where their mouths are - which must at least be some consolation to investors in the group. The bulk of them were bought by John McGuckian, a Northern Ireland businessman who is Ulster's chairman, who added 4 million shares to his holding.

It is good to recall a recommendation from this column of a little over a year ago, in April 1996, when we said shares in Rentokil were a sell. The group, since renamed Rentokil Initial after it won its bid for services conglomerate BET, would find it hard to sustain the record of 20 per cent annual growth. Immodest to crow it may be, but from December of last year, the shares have gone nowhere - while the rest of the market has soared. It is perhaps still too soon to say for sure if the glory days are over, but there are too many doubts to suggest the shares are the buy they were five years ago.

On a potentially more profitable note, Sherwood International, a software supplier to the life insurance, pensions and reinsurance sectors, looks to be making some useful progress. Its AMARTA software has had its first sale in the US, to Northwestern Mutual Life, with two further sales notched up in South Africa. This may sound like small beer, but the US market is enormous, and the sale came through a prestigious computer consultant, which only sells to the top 200 institutions.

The group's record over the past eight years is patchy, but in the last two years, the dividend has grown 87 per cent and 20 per cent, with a further 20 per cent hike at the halfway stage just gone. Margins are also improving, and there is good reason to suppose there is further upside to come.

By the end of the year, it would be fair to expect the operating margin to have reached 8.6 per cent, from 6.6 per cent at the time of the interims. The shares, however, trade on the very reasonable level of 15.6 times current year earnings, and 12.7 times 1998 earnings.

RICHARD PHILLIPS

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