Stock Market Week: Gap between rich and less well-off reaches `alarming proportions'

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The Independent Online
The sad performance of many small companies in the rampant bull market is baffling.

While Footsie has soared to new highs, the rest of the investment pack has limped tamely behind. Indeed Patrick Orr at stockbroker Panmure Gordon believes the gap between the big and small has "reached alarming proportions".

It is, however, not just the tiddlers which have been confined to the stock market dog house. The medium-sized groups making up the FTSE 250 index have had a desperately unexciting time, particularly in the past year.

Mr Orr has compiled his own "misery" table comparing the rich and the less well-off. The gap has never yawned so wide.

He calculates the present bull market started in March two years ago. Since then shares of smaller companies recorded a 39 per cent gain against 57 per cent for blue chips.

The underperformance is a bit of a mystery. Historically, says Mr Orr, it is in bull markets when smaller companies outperform and then by a large extent. They need to turn in rip-roaring displays to balance the miserable times they experience in bear markets.

Unless the tiddlers start to turn in Herculean displays the second quarter of this year will be the worst three months they have experienced in the past 11 years.

The strength of banks, which has clearly inflated Footsie, is one reason put forward for the uneven displays. But Mr Orr suggests this is merely bending data to make a case. He says: "The smaller company sector has a thriving financials sector... and it is in the nature of index performance that some sub-sectors will be doing better than others at any one point in time. It is rare to see persistent across-the-board outperformance."

Given the economic environment smallcap shares should have beaten their blue chip rivals. Certainly the gap between big and small should narrow. However a revival by the little 'uns looks unlikely. Footsie could suffer a sharp correction, a swing which would be welcomed by cash-in-the-bank Tony Dye at the underperforming PDFM fund management group and the persistent prophets of doom like David Schwartz.

Yet most observers think Footie is set to continue on its merry way, with year-end predictions of 5,000 points being sprayed around.

But long-term Footsie bulls, Bob Semple and David McBain at NatWest Securities, have introduced a note of caution into their calculations.

Early this year they produced a year-end target of 4,600, well ahead of most other strategists. Now, with the index above 4,600, and on occasions even through the 4,700 barrier, they are advocating the market should pause for breath. Valuations look a little stretched.

The long-term bull market case remains intact but the Government offers a threat. Say the NatWest duo: "Any changes in the treatment of the dividend tax credit would not only alter the current yield on the market but probably also reduce future dividend growth. New Labour may be gilt friendly but it is by no means clear at this stage they will remain equity friendly."

If, in the looming Budget, the Chancellor, Gordon Brown, does heap more taxes on companies or discriminates against dividends then there must be a distinct possibility the NatWest bulls will surrender some of their enthusiasm.

There are unlikely to be any uncomfortable ripples on the profit front this week although the water dividend season gets under way.

Five water companies report year's results with Anglia getting the tide flowing tomorrow with profits likely to emerge at around pounds 250m (pounds 238m).

On Thursday South West with pounds 122m expected compared with pounds 110m and United Utilities with pounds 475m (pounds 389m) wade in. The still-to-be-redeemed Yorkshire Water, which failed lamentably last year, should produce pounds 211m (pounds 207.6m) on Friday.

Mid Kent, which fought so furiously and ultimately successfully against a double French takeover assault, reports on Thursday. Profits will be down, reflecting the cost of the bid battle. Around pounds 11m against pounds 12.7m seems likely.

EMI, the showbiz group which failed to attract the bid so many predicted once it spilt from its rental side, has the chance to show its year's profit routine today.

Up to pounds 400m is possible against pounds 367.3m last time. The music business has not been easy and EMI is one of the casualties of sterling's strength. But the final quarter is thought to have been encouraging and could offer the optimists some consolation for the failure of that long-awaited takeover to appear.

EMI's spurned other half, the Thorn rental group, reports tomorrow. Its presence was regarded as EMI's poison pill. Hence last summer's demerger being seen as leaving EMI as a pure showbiz group wide open to a bid.

Thorn shareholders must wonder if they would have been better off if the old group had stuck together.

As a stand-alone company Thorn has been a disappointment with its shares crashing from 394p at the time of the demerger to 152.5p last week. US litigation and a warning profits would be little changed have done the damage. Last year's figure was pounds 170.7m; a dip to pounds 170m with a modest dividend increase to 13.2p is the likely outcome.

Allders, the department store chain which has expanded through the acquisition of Owen Owen stores, should produce pounds 15.5m against pounds 8.2m and Stakis, the casino and hotel group which once seemed destined for the corporate cemetery, is likely to nearly double profits to pounds 23.6m.

It, too, has expanded, buying from Lonrho the Metropole Hotels chain. Both report interim results.

An acquisitive creation with a profit offering on Thursday is engineer Siebe. Its latest major takeover, APV, has still to be cemented. Profits up around 30 per cent to pounds 420m will again look impressive. But the quality of the APV deal may prompt a few worries.

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