The spectre of recession came back to haunt the London market last night, sending the benchmark index below 4,000 points. Investors sold out of blue-chip companies after official data showed that the British economy shrank by 0.5 per cent between July and September – its worst performance for 16 years.
George Buckley, the chief UK economist at Deutsche Bank, said that while a contraction had been expected, the size of the fall, coupled with indications from recent economic surveys, suggested things could get even worse in the final quarter of the year.
"This is the largest quarterly decline in gross domestic product since the end of 1990, raising the possibility that our forecast for a total loss of output from peak to trough of 2.3 per cent, similar to the scale of the last recession of the early 1990s, proves too conservative," he added.
The gloom depressed the FTSE 100, which closed 204.47 points down at 3,883.36, a fall of 5 per cent. The FTSE 250 fell 335.09 points to 5793.56, down 5.47 per cent. Those searching for a silver lining pointed out that there was no exceptional spike in trading volumes. A sudden surge in the number shares changing hands would have indicated panic selling, they said. One trader explained: "It is bad, but not as bad as it could have been. The market looked like it was heading for a serious, serious crash in the morning but Wall Street appears to be holding up, which helped bring the FTSE back after being down more than 8 per cent earlier."
Shares in two of the biggest banks in the emerging markets – HSBC and Standard Chartered – were sold amid concerns about the impact of the slowdown on up-and-coming economies. Standard fell by 15.8 per cent, or 142p, to 758p, while HSBC was down 13.5 per cent, or 109p, at 696p. Morgan Stanley, which reduced its target prices for both banks, said HSBC's dividend was exposed as its earnings slid and capital came under pressure. Of Standard Chartered, the broker said: "Our economists are increasingly negative on emerging market growth and our Asian banks team is negative, reflecting reduced revenues as the economy slows, falling wealth management revenues and deteriorating asset quality."
HBOS was the weakest lender, losing 17.7 per cent, or 12.9p, to close at 59.9p, while Royal Bank of Scotland shed 9.25 per cent, or 6.2p, to 60.8p, slipping below the 65.5p per share price at which it is offering new shares in its capital-raising. Early relative strength on Wall Street prompted a turnaround for a few stocks as braver investors searched for bargains. As a result, the mining group BHP Billiton, which at one point fell 66.5p to a low of 756.5p, climbed back to 868.5p. Lonmin bounced back from a low of 1050p – a fall of 112p – to close up 12p at 1174p.
On the FTSE 250, the European newspaper publisher Mecom, which issued a profits warning earlier this week, fell by a further 20.3 per cent to 2.95p after analysts at RBS said the "shares represent option money on Mecom's survival".
Retail stocks also suffered as recessionary fears took hold. Debenhams was down by 4.25p, or 14.9 per cent, at 24.25p, while DSG International lost 14.7 per cent, or 3.75p, to close at 21.75p after Panmure Gordon said that, given the DSG board's refusal to comment on its dividend in a recent trading statement, analysts assumed there would be no payout this year or next.
"Companies make their own rules. If DSG thought there was a possibility that consensus forecasts for its dividend were accurate, it would not have hidden behind the 'this is a sales statement' line," the broker said, adding: "Management was happy to talk about capital expenditure, so the fact the dividend was a no-go area leads to a very natural conclusion."
Pub operators were also unsettled by the economic gloom. Punch Taverns fell by 15.2 per cent, or 21.25p, to to 118.5p, while Enterprise Inns lost 13.2 per cent, or 14p, to close at 92p.
Among smaller companies, fears for the state of the property market bore on the property fund Warner Estate Holdings, which fell by 21.9 per cent, or 15p, to end the day on 53.5p.
Elsewhere, the marine electronics manufacturer Raymarine suffered a fall for the second day running, sliding by 23.9 per cent, or 4.25p, to 13.5p, after Goldman Sachs, weighing in on the recent profits warning and financing worries, slashed its target price for the stock from 125p to 47p.
"Our view, given the positive underlying cash generation of the business, is that successful refinancing is probable. However, in the current environment, with credit availability scarce, we accept that the shares are unlikely to reflect this until great certainty emerges," the broker said in a note as it switched its opinion of the shares from "buy" to "neutral".
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