Stock Market Week: Not much ado in the markets over the prospect of a Labour win

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The Independent Online
By the end of this week Tony Blair, judging by the opinion polls, will be installed at Number 10 and the stock market will have to get accustomed to living with a Labour government.

For many earning their living from the market and for many private investors it will be their first experience of anyone other than the Tories in power.

The market view is that a Blair administration will herald only a minor shift in economic policy; hence the laid-back attitude displayed by Footsie during what little blood and thunder the election campaign has so far produced.

In days gone by overseas investors took fright at the prospect of Labour in power. This time there has been, so far, hardly a perceptible ripple of unease.

Equities have been much more preoccupied with the highways and byways explored by Wall Street than anything quite so mundane as a domestic election.

Only last year at least one of the big US investment houses was fretting about Labour's impact on the market. It drew attention to the companies where US investors have established strong positions and raised questions about the danger of them dumping their shares if the Tories were ousted.

Any comment these days is much more restrained. Goldman Sachs, the US house, says it would "remain underweight" in equities but "remains reasonably constructive" on gilts.

It expects any new government to increase interest rates, probably next week, and suggests a summertime budget to take the heat out of the economy.

Goldman's equities caution is, however, possibly only short-term. Its underweight position is "until the current phase of rising base rates/rising sterling is over".

Since John Major signalled the rush to polling day, Footsie has performed remarkably well, losing 54.4 points from what was a near peak.

One factor has been the seeming inevitability of the poll result. This has meant opinion polls have had hardly any impact on the market's performance, with last week's stray poll showing a sharp narrowing of Labour's lead making no discernible impression.

Whether the reality of Labour in power will continue to produce such a sanguine response remains to be seen.

Utilities must be vulnerable. A one-off windfall tax of, say, pounds 5bn, seems to have been factored into share prices. There is also confusion about the number of privatised companies due to be caught in the net; will, for example, it enmesh BT, an important world telecom player, and Railtrack?

If the windfall tax goes much beyond pounds 5bn, say to pounds 15bn, or becomes a regular cash flow for a hard-up Labour administration then the market's calculations will have to be redrafted.

There must also be some concern about the foreshadowed changes in the regulatory and environmental climates the utilities will face. They are bound to erode profits.

The market will also have to contend with higher taxes. Income tax, after the pledges, should be safe for a while. But company tax seems destined to increase, upsetting institutional investors. Tinkering with some other aspects of the Tory tax regime, perhaps PEPs, must be a possibility.

Such tax moves could, of course, awaken the fears of foreign investors; even a modest trickle of overseas selling would quickly unsettle the market.

Forecasts of Footsie's level in a year's time remain largely bullish. Nomura is on 5,000 points and NatWest Securities looks for 4,700. Legal & General has one of the more downbeat predictions; even so its caution only stretches to a 4,200 figure.

Dominating a short list of company results is Sears, the sad, struggling retailer which presents year's profits tomorrow. Almost every Sears board meeting these days attracts speculation about the future of the chain's beleaguered chief executive Liam Strong and the possibility of a break- up.

The figures will, by general consent, be awful. They were trailed when Sears made what was a disastrous Christmas trading statement.

In the past year the sprawling retail group has experienced the fiasco of its on-off shoe shops sale and the shambles over the sale of its mail order operation.

Profits are likely to emerge at pounds 55m against a depressed pounds 74.4m. Do not be surprised if the dividend is cut, although most expect an unchanged payment of 3.95p a share.

There is just a chance the group will produce the unexpected in a bid to mollify disgruntled shareholders. Could it, perhaps, offer a plan to demerge its prestigious (and highly profitable) Selfridges department store? Or perhaps another shoe shops deal is in the wind.

One thing seems certain. With the Monopolies and Mergers Commission just getting its investigation into the planned Freemans sale under way there will not be any surprises on the mail order front.

NatWest Securities calculate a break-up value of 81p. And it reckons, after allowing for debt financing, any bidder would have to look to 65p as the break-even level.

BAT Industries is another where demerger talk persists. As the continuing tobacco litigation saga becomes increasingly confused the case for splitting the financial and tobacco sides grows stronger.

But, in the short term at least, BAT seems to have set its face against any split. The two constituents will produce higher profits when first- quarter results are presented on Wednesday. It is estimated the smoking side, thanks largely to higher prices, will lift profits by around 8 per cent and the financial division's gain will, in percentage terms, not be far behind. Total pre-tax figure is likely to be just over pounds 600m against last time's pounds 566m.

Another giant, Shell Transport & Trading, also offers first-quarter results. On Thursday earnings should emerge at pounds 1.35bn, a 17 per cent decline on the same period last year, but, despite lower oil prices, a little above the final quarter of 1996.

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