Stock Market Week: The 20-year bull run is not over yet

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The Independent Online
IT'S BEEN a splendid year for blue chips, despite the autumn collapse of confidence, which prompted agonised squeals of despair and the usual array of declarations that the bull run was over and the bears would be left to feast on the bones of the stock market.

Last week Footsie closed at 5,741.9 points, representing a not inconsiderable 600 gain so far this year and thereby preserving the 20-year bull run.

Mind you, the index has not, as yet, lived up to the heady hopes expressed at the start of the year. But a merry festive run - the signs last week were encouraging - could push Footsie to a level which justifies the predictions circulating as 1998 got under way.

Many City experts were convinced Footsie would end the year comfortably above 6,000. They can, even if the seasonal run fails continue, say with justification they were on the right path. Unfortunately, they could be accused of getting one essential element of investment strategy hopelessly wrong - their timing.

The index crossed 6,000 in April and went on to peak at 6,179 in July. Then it was downhill with a year's low of 4,599.2 hit in October before sanity returned and a revival got under way.

The slump, with the benefit of hindsight, had been waiting to happen. The simmering Russian economic crisis suddenly exploded, prompting Asia's already appreciable problems to be regurgitated with increased force.

British businessmen became more vocal about the strong pound and its impact on company earnings, and profit warnings almost acquired a nuisance value.

The misdemeanours of President Clinton started to ruffle New York and then the Long-Term Capital Management hedge fund disaster hit a startled market, provoking wild stories of a deluge of financial disasters and confident predictions that the world's banking system was on the brink of collapse.

As Footsie plunged, those earlier, so-confident forecasts were pulled back. Bob Semple and David McBain at BT Alex.Brown, for example, revised their year-end estimate to 5,500.

The worries which created the autumn retreat have now faded. Still the problems of Asia and Russia have not gone away, and sterling, despite a cracking run of base rate cuts, remains resolutely strong. But the banking crisis was a hysterical illusion and it would be surprising if the Clinton affair is not now largely factored into calculations.

Although Footsie has, helped by the sheer weight of investment cash sploshing around the system, recovered much of its equilibrium and forecasts for next year are starting to look increasingly chirpy, the rest of the stock market remains a deeply depressed area.

Second- and third-line shares fluttered in the first half of the year, even hitting new highs, but their under-performance has been frightening, and the mid cap, small cap and fledgling constituents look bombed-out.

As Richard Jeffrey at Charterhouse Tilney pointed out recently, the small cap index has under performed the All-Share index a staggering 40 per cent in the last two years.

The stock market in recent times has become very much a market of two halves - Footsie constituents enjoying all the fun and most of the rest limping along, looking decidedly distressed.

The reasons for the contrasting fortunes have been well documented. The lack of liquidity which hampers dealing in smaller company shares is increased by the reluctance of many institutional investors to venture outside the confines of Footsie. They want to buy and sell shares smoothly and easily and that is not possible with many on the under-card.

It is a chicken and egg situation; until big investors are prepared to take a more active interest in small company shares and liquidity in them consequently improves, they will remain neglected.

There is, of course, plenty of hidden value at today's share valuations. The continuing flow of cash takeover bids, often from overseas, is an indication of the merits lurking on the under-card.

And the growing and rather worrying growth in management buy-outs is another example. It is understandable that managers become irritated by the low - and they believe inappropriate - value placed on the their company and their labours by the stock market. So they unlock value by mounting a cash bid, usually backed by venture capitalists.

Independent directors and outside advisers are consulted but the managers are in a better position than anyone else to appreciate the true value of their company and it would be surprising if they do not make sure they get a bargain. Certainly they would be foolish to pay even a penny over the top.

So at the end of the day it is the shareholder who is in danger of getting ripped off and as smaller companies are largely the preserve of small, private shareholders it is, as is so often the case in the stock market, the little guy who suffers.

Will the situation improve for the small company next year? Hope springs eternal. Mr Jeffrey says there is "exceptional value embedded in small company ratings" and believes a rally could occur in the middle of next year.

Still, the long-running under-performance by the little 'uns provides fuel for the argument that the fact there are, in effect, two stock markets should be recognised by a two-way split - an international market for, say, the 100 shares in Footsie and the 250 in the mid cap index, and a domestic one for the rest.

Indeed it could be argued that the computerised order book, currently embracing 125 shares and intended eventually to take in the top 350, is laying the foundation for an eventual division.

Clearly the demands of the likes of Glaxo Wellcome, capitalised at pounds 71bn, are far removed from those of the little cider group Merrydown, with an pounds 8.2m valuation.

The requirements of institutional investors and private shareholders are also vastly different. Although there would obviously have to be cross- fertilisation, with big and small investors able to deal in both markets, a dual operation would have much to commend it.