Stock Market Week: Footsie's retreat heightens fears that the bull market is over
Monday 01 September 1997
In four days the blue chip index fell 83.6 points to 4,817.5. It is now 269.3 below the peak achieved early last month. At the start of the year Footsie was at a then high of 4,118.5.
Its relentless progress since then, produced against a chorus of bearish comment, caught experts on the hop. In January, a Footsie standing at 4,600 points by the year-end was the most optimistic forecast on offer. Naturally adjustments to predictions were made as the year progressed and it is currently not difficult to find forecasts suggesting Footsie will end December at least at 5,000. It would not be surprising if the optimists are now suffering gnawing spasms of anxiety.
During its run this year, the stock market has absorbed all the expected problems, such as rising interest rates, inflation and the impact of a rampant sterling, as well as the uncertainty created by the election and change of government. If the market was going to suffer a major hit after all this, then the blow would have had to come from an unexpected quarter.
As it happened, few had factored a Far Eastern storm into the equation. Currency turmoil in Thailand had hardly been noticed. Suddenly the currency and share markets of the Tiger economies are in disarray and just what sort of impact their discomfort will have on western markets is occupying City minds.
As Robin Griffiths and Fiona Bolt at HSBC said recently: "The end of a bull run comes like a thief in the night".
So is it all over? Have shares peaked and the likes of Tony Dye, the PDFM fund manager who piled into cash after banking on a share crash, at last going to be able to catch up after missing this year's equity party?
"Red" Dye is not the only fund manager to be wrong-footed by the strength of the market. He attracted attention because he adopts a high profile and displays a refreshing candour in discussing his views. Many other fund managers have privately voiced the opinion the market is far too high. Indeed they could be heard saying so when Footsie was 4,400. Naturally enough the rarefied altitude of nearly 5,100 left them looking exceedingly embarrassed and their portfolios, no doubt, the subject of urgent discussion with their trustees.
The Asian crisis could quickly blow over, although some observers are intent on producing a doom and gloom scenario. Seemingly powerful upsets in distant parts have a habit of fading. There has, as yet, been no evidence of nervous selling in London and price movements have often, for reasons best known to market-makers, been exaggerated.
New York, as always, holds the key. To some extent the rest of the world has to meekly trot along the route adopted by the biggest market of them all.
New York is closed for Labor Day today. Ahead of the resulting long weekend, there was clearly a reluctance on Thursday and Friday to get too deeply involved; so the extent of the American reaction to the Pacific problems has yet to be quantified.
It is likely that after a modest hiccup, London blue chips will settle down, even if they do not resume the heady progress they have achieved this year. Still, it must not be overlooked that the tenth anniversary of the 1987 crash occurs next month. It could be a nervous time. On the other hand, there is no reason to believe shares will not enjoy their traditional roll in the Christmas run-up.
Interest rates and other economic and political influences permitting, a Footsie standing around the 5,300 mark in a year's time looks a realistic expectation.
And there are unusual straws of hope in the wind. For example, Mark Tinker at UBS believes the Budget removal of tax credits could provide a spur to the market, with the ACT changes possibly prompting a deluge of share buy-backs.
"With the present low value of gearing it is possible to enhance shareholder value by adding debt and buying back equity," he says.
"The amounts involved are potentially staggering. Were the UK to move to the same level of gearing as, say, Continental Europe or the US, it would imply over pounds 100bn of share buy-backs."
In this country, companies are on average 30 per cent geared compared with more than 60 per cent in America and on the Continent. He believes the ACT change could push companies towards taking on more debt and thereby the advantages of debt tax breaks. "Interest payments can be offset against corporation tax, dividends cannot," he points out.
The main beneficiaries of share buy-backs are large groups, say the top 350. The rest of the market would probably react with splendid indifference to any such move. The small capitalisation companies seem, at least for the time being, to be unable to pick themselves up, no matter what the incentive.
The supporting FTSE 250 index and the FTSE Smallcap index have both missed this year's equity party and even the relatively modest enthusiasm displayed early last month has since been snuffed out.
A busy reporting schedule this week stars Burmah Castrol, Hillsdown Holdings, Jefferson Smurfit, JD Wetherspoon and Schroders.
Burmah is one of sterling's casualties and the strong pound will take the shine off interim figures, due today. Net income little changed at around pounds 68m is the guess.
Like the rest of the packaging and paper industry, Smurfit has found the going tough and interim results down from pounds 126m to near pounds 50m seem likely.
Hillsdown will have experienced flat food profits but should have scored on the house-building front. A modest overall interim improvement to pounds 53m is expected.
High-flying pub chain Wetherspoon should serve up year's profits of nearly pounds 18m against pounds 13.1m before, and Schroders could produce an interim result of pounds 130m, up from pounds 115.9m.
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