The silly season has only just started
City & Business
Sunday 18 August 1996
Certainly, the markets liked the apparently healthier state of public finances on Friday with a fall in the government deficit to pounds 8.8bn for 1996 so far, against pounds 12.1bn at the same stage last year. That, a rally on Wall Street and a clutch of strong company results pushed the FT-SE 100 index of leading shares to a record 3,872.9 at the close of play.
There were the inevitable siren calls, with broker Hoare Govett warning that brisk market conditions would peter out in the second half. For the moment it seems alone, however, with several investment houses forecasting the first ever break of the 4,000 barrier by the end of the month. This is supposed to be sleepy August, remember, so whatever happened to the old adage "sell in May and go away?"
This week will also see strong performances from the companies reporting, including BSkyB and Argos, which will be taken as yet more proof of returning consumer confidence.
A gaggle of bids also seems in the offing to sustain the run as the prospect of an early general election recedes. Unichem and Germany's Gehe are already squaring for a pounds 600m rematch in the battle for Lloyds Chemists.
The consensus is that frenzy will once again grip the utility sector once the holidays are over. A pounds 780m bid for South West Water is still in the lap of the Monopolies and Mergers Commission and advisers to the surviving electricity firms, notably Yorkshire and East Midlands, are on constant bid alert.
Speculation refuses to go away over Zeneca and merchant bank Schroders, one of the strongest performers last week; likewise Yorkshire Tyne Tees among the smaller, but hardly small, fry. And who knows what might happen to EMI, due to make its pounds 6bn market debut on Monday, in a bumper year for deals that may outpace last year's record pounds 36bn.
On the face of it, July's Public Sector Borrowing Requirement figures attest to healthy expectations for the corporate, as well as the personal, sector. Kenneth Clarke has rediscovered his missing tax millions with a 20 per cent rise in VAT and 33 per cent jump in corporation tax receipts.
As broker UBS points out, however, the VAT growth may be illusory, accounted for by rule changes on timing and unwinding of sluggish manufacturing stock.
One-off privatisation receipts contributing to the boost in revenues have also helped mask a deterioration in government spending.
As the Chancellor stokes a pre-election boom, a tax giveaway is certainly on the cards. Unsustainable maybe, but a pre-election windfall nonetheless, despite Mr Clarke's lip service to financial rectitude.
So after the week's rosy headlines, are there other siren calls that may make the market pause for thought?
Well, yes. On Monday, credit information group CCN publishes its latest quarterly, Corporate Health Check, which will make avid reading for the sceptics. Surveying Britain's top 1,000 private-sector firms, it finds that overall corporate profitability has been static since the middle of last year. Investment has fallen sharply, with manufacturing back in recession, as consumer growth has failed to offset a decline in exports.
"The current cut-price consumer boom is not sustainable," CCN managing director David Coates warns. "Moreover, consumer-led growth simply sucks in imports and, more often than not, leads to rapid corrections in interest rates."
Last week's jobless figures were accompanied by the inevitable Bank of England warning on inflation and interest rates. The figures themselves, incidentally, contained a puzzle: unemployment benefit claimants fell to 2.13 million, the lowest in five years, yet the total workforce in jobs has also dropped. The answer, of course, is that too many easy headlines equate claimants with the number of people actually out of work. Since 1979, the Government has made no fewer than 31 changes to eligibility for the dole.Those on invalidity benefit, for example, have risen so fast it seems as if a veritable epidemic of bewildered, jobless people have fallen under buses outside the job centre.
The independent Employment Policy Institute estimates that the true number unemployed and looking for jobs is 4.2 million. Coupled with the rise in part-time working and insecurity over short-term contracts, this points to a rather larger pool of people unable to partake in (and sustain) a boom than Government figures would have us believe.
After the election, most commentators agree that both interest rates and taxes will have to rise. As for the public purse, UBS puts it starkly: "Our expectation is that the Chancellor will marry a tax giveaway of around pounds 3bn with illusory spending cuts, either leaving an incoming Labour government to foot the bill or a victorious Mr Clarke to repent at leisure."
Back then to "old boom and bust", which after a heady August, may yet give the market thought to pause.
Liven up, Rentokil
WHAT has newly ennobled Sir Clive Thompson to do to sustain his loyal City fans? After a surge since victory in its pounds 2.2bn bid for BET in April, Rentokil's shares have lost their edge over the last week or so as the market awaits this week's interims.
Last week broker BZW issued a sell note, while top sector analyst Mark Sheppard at UBS became more lukewarm.
On Thursday, boosted by two months of BET, Sir Clive will inevitably show the 20 per cent profits and earnings growth on which he has built his following over the last 15 years. The market, however, has seen little information on the integration of BET to appreciate the longer-term strategic merits of the deal. If Rentokil's advisers are to be believed, little will change on that score this week. Sir Clive may yet be more effusive or pull a surprise disposal out of the hat.
Until he does, the shares may mark time until the City is convinced Rentokil has not just turned into an old-fashioned conglomerate. Last week, Hanson gave a fresh reminder of how out of vogue the ilk now is.
IT MAY hardly be just, but Lloyd's of London's survival plan now has an unstoppable momentum that was almost inconceivable a year ago.
The Paying Names Action Group may yet seek to appeal the High Court's decision last week to throw out its case for judicial review. But with the judges fully behind the 300-year-old market, it is hard to see that the result would be any different.
PNAG members have suffered because they have paid their losses and are now being asked to cough up even more. Lord Justice Brooke said their case lacked merit and, anyway, he had no powers to intervene.
Lloyd's has too long been able to hide behind its own Act of Parliament, and pledges to clean itself up have so often gone by the board.
When Equitas goes through, as it surely now will, the Government should follow the Select Committee's urgings and introduce statutory regulation.
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