Shares: Week ahead - A good year for blue chips but smaller companies have been left behind
Monday 22 December 1997
Strategists were generally cautious when they made their 1997 predictions. A year-end Footsie at 4,600 points was the most confident forecast I encountered.
An illustration of the collective caution which abounded early this year is provided by one of the share tipping lunches so beloved by the City. In January the top men at Credit Lyonnais Laing, the securities house, held their yearly meeting with the City's stock market reporters. Over lunch at CLL's Broadgate headquarters the assembled hacks and securities men produced their share tips and year-end Footsie forecasts.
One market reporter failed to arrive - a victim of the flu bug. As a humorous after- thought someone suggested our absent friend should be accorded at least a Footsie forecast. Jokingly he was credited with what then seemed an outrageous target - 5,150 points. With the index then riding at 4,228.4, it was assumed at least one contender had been written out of the competition.
My forecast was 4,600. There was one at 5,000 but most were in the 4,200- 4,800 range with seven looking for the index to give ground. Three thought it would go below 4,000; the lowest estimate rested at an exceedingly gloomy 3,250.
It is true, of course, that it's been very much a blue chips' party. Indeed, within Footsie individual performances have been uneven, with financials, by far the biggest contingent, and drugs doing particularly well. Utilities, despite the arrival of a Labour government, and oils have also prospered.
Throughout the year the supporting shares making up the FTSE 250 index lagged their peers; and the third and fourth-liners have been largely ignored. Institutions have tended more and more to devote their attention to the front-runners; the liquidity such stocks offer is the main attraction. Blue chips are also more deeply researched.
The FTSE 250 constituents draw institutional interest although it is often fairly tepid. As for the shares making up the rest of the market, they are all too frequently shunned by the major investors.
The midcap index has climbed only 214.64 points this year to 4,705.1. The FTSE SmallCap index, which closed at 2,295.1 on Friday, has not sparkled although it has provided a better return than a deposit account.
Some small company followers wonder if there is an opportunity for the Prudential Corporation once again to take the initiative.
When the stock market was on its knees 23 years ago and the very future of capitalism was questioned, the Pru, according to City legend, called fund managers to its High Holborn office and suggested they collectively buy the market. A sum of pounds 20m was apparently earmarked. Immediately shares responded. The old FT 30 index, down to 146, perked up and topped 250 by the end of the month. Come the year-end it was above 380.
The little used 30-constituent index is still calculated; it is around 3,280.
So, perhaps, if the Pru let it be known it had invested a few million pounds in smaller companies and encouraged others to do so, it could provide the sort of confidence in the market's under-card which has been lacking.
There is plenty of value in the lower reaches. The rush of takeover bids for the smaller fry underlines that their fundamental attractions remain in place. They are merely suffering from an investment malaise. It is perverse that it should require a takeover bid to highlight the investment merits of a company.
Allied Colloids, the chemical group, spent most of the year dillying and dallying, slipping from around 135p to 101.5p. The shares, now Hercules of the US has slapped in a bid, are riding at 164p. And, what's more, Allied thinks the Americans are trying to get it on the cheap, and is resisting the 155p a share offer.
Indeed American groups have tabled another six non-Footsie bids. More are expected.
One aspect of stock market life unlikely to trouble the tiddlers is order-driven trading. Footsie shares have already been pulled in; the midcaps are destined to go on the order book although, with the system under attack, their recruitment could fade into the far distance.
The Stock Exchange has, in fact, admitted that order-driven trading has its shortcomings by what could be regarded as rigging share prices on New Year's Eve. It is so concerned that maverick prices may creep in it is prepared, for the first time, to recalculate closing prices if trades are out of line.
New Year's Eve is an important day in the investment calendar; its closing prices are used for many investment valuations. So accuracy is essential. However, what about any valuations made on the Friday when two JP Morgan traders rigged Footsie? Will they be changed, as I hear one fund manager is demanding?
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