Shares: Some capital reasons behind Footsie's continued bull run
Monday 02 February 1998
Share buy-backs and special dividends have been responsible for swelling the coffers of investors, both institutional and private. But in most cases the cash is re-invested, finding its way back to the stock market and inevitably helping to push shares still higher.
Last year, the major special dividends and buy-backs produced around pounds 6bn. This year, NatWest Securities estimates, the figure could be pounds 10bn.
It could be argued that institutional shareholders already have an embarrassment of cash riches. Many fund managers have stood back as Footsie has exceeded peak after peak.
They have built up cash piles, sniffing disparagingly that shares are overvalued and declaring they will not venture forth until blue chips are more realistically priced. The trouble, from their standpoint, is shares have grown more expensive as they have dithered.
To pile on the discomfort share buy-backs are reducing the number of shares available for them to buy when they do move into the market.
Bob Semple and David McBain at NatWest say one of the compelling bull arguments is the "institutional demand-supply balance". They believe institutional cash flows will be around pounds 63bn this year but the net supply of shares will fall way sharply. "We forecast a near pounds 4bn outflow in 1998," they say.
The NatWest men say resources giant Rio Tinto's decision to buy back 10 per cent of its shares over 18 months is likely to cost pounds 1bn and means pounds 6bn is earmarked for shareholders.
The bull case is also supported by Merrill Lynch's insiders' survey. It discovered that in December five directors bought shares in their own companies for every one who sold. "This is the strongest positive signal from our UK equity insider indicator since November, 1987", when, of course, the market was struggling to recover from the dramatic crash which devastated prices. Surprisingly, there is nowadays a tendency to write off the 1987 crash as a mere hiccup in the history of stock markets.
Fund managers, according to another Merrill survey, remain cautious on shares. They could be talking their book?
Allan Collins at stockbroker Redmayne Bentley offers another reason why optimism should prevail. Fund managers are already strong in government stocks and there may not be much new stock issued this year. "So equities could be swinging back into favour simply because there are few attractive alternatives."
He adds: "The prospect of further consolidation in the leading sectors could be enough to have the big boys dipping into their bulging cash boxes.... As far as equities are concerned, the UK is the place to be at the moment."
Prediction, of course, is a hazardous exercise. Shares have a nasty habit of leaving the experts with egg on their faces. Last year's Footsie surge caught most on the wrong foot. Despite the vast array of expensive and sophisticated research available, markets have behavioural problems which are nearly impossible to rationalise.
David Schwartz, who spends much of his time studying market quirks, has produced an interesting, little appreciated statistic. His delving shows that in the final week of January shares have advanced in 19 of the past 22 years.
Why? Mr Schwartz is at a loss for an explanation. And it is doubtful if any expensive research could provide one.
Last week Footsie, when many were suggesting the bull market was at last running out of steam, gained a remarkable 277.1 points, hitting new highs on three consecutive days.
But if the outlook is regarded as bright for blue chips there remains a reluctance to offer comfort to the market's under card. Small companies have limped lamely behind their peers, as illustrated by ABN Amro Hoare Govett's small companies index. Although it reached a peak during last year, ending 9.5 per cent higher, its display paled into insignificance when measured against the 28.7 per cent Footsie rise and, indeed, the 23.6 per cent gain achieved by the FTSE All Share index. What from the smallcap viewpoint is, perhaps, more worrying is that the Hoare index has performed below the All Share index on an annualised basis since 1989.
Yet from 1955 to 1989 it outperformed the All Share by 6 per cent. Professors Elroy Dimson and Paul Marsh believe this movement away from small companies is simply a result of the smaller fry growing more slowly in recent years than bigger groups and "market prices have adjusted accordingly".
BAA, the airports group, and Imperial Chemical Industries, dominate this week's results programme.
Today BAA flies in with nine-month profits expected to be around pounds 410m, against pounds 397m last time. ICI, on Thursday, offers year's results. Once regarded as the bellwether of Britain's economic health, ICI's results no longer have the impact they once enjoyed.
Market expectations are already low. Following the sweeping changes at the group, rather dismal profits of around pounds 395m, down from pounds 603m, are likely. Still, hopes are running high there will be a strong rebound this year at what is now a speciality chemical group to, say, pounds 625m.
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