The Week Ahead: Two-tier market becomes reality

FOOTSIE INTERNATIONAL is reshaping its small company share indices and, perhaps inadvertently, offering comfort to those advocating that the stock market should be split in two, a big board and the rest.

From the last day of this month the small cap and fledgling indices will be merged into the FTSE All-Small index.

So Footsie International's main share indices will be divided in a way that many think the market itself should be.

A two-tier market has a great many advocates.

There is, after all, a yawning gulf between the requirements of institutional investors and small shareholders on the one hand, and a blue chip like Glaxo Wellcome (capitalisation pounds 66.5bn) and the brewer Tom Hoskins (pounds 2m) on the other.

The new All-Small index will embrace what many see as the domestic market.

The main Footsie 100 index and the 250-strong mid cap index, the likely composition of any big board, will continue.

The two leading indices, as if indicating the shape of things to come, are already joined in the composite FTSE 350 measure.

Footsie, of course, dominates the market.

It accounts for nearly 78 per cent of its value; the mid cap shares represent 16 per cent.

Currently the 484 companies making up the small cap cover just over 4.8 per cent and the fledgling's 777 members represent 1.4 per cent.

With the controversial computerised order book now accommodating 125 shares and still aiming to embrace the top 350 shares, it could be reasonably argued that the possibility of a two-tier market may even have the tacit support of the Stock Exchange powers.

Brian Winterflood, the leading market maker in small companies, has for long favoured a two-tier market.

Indeed he wonders whether, with the advent of the order book, "the polarisation of the market into two segments has finally happened".

He believes a market for major shares and a domestic market should be created.

"Begin separate boards for both exchanges but keep them under the one authority, ie, the Stock Exchange, to give them both the credibility required by investors and companies alike", he suggests.

The new All-Small measurement will, unless there is a dramatic upsurge during the month, throw into stark contrast the harrowing time the market's undercard has endured compared with blue chips.

As investment house ABN Amro points out, the relative yield on the old Hoare Govett Small Companies Index is back to levels last seen in the Sixties.

"While the fundamental outlook for small companies remains problematic in the short term, value is now firmly on their side," it says.

Professors Elroy Dimson and Paul Marsh, writing recently in ABN's Market Focus, suggest that the reversal in the ratings of small company shares, which has taken place since the Eighties "has not been driven by a shift in sentiment ... rather it reflects a deterioration in the underlying business performance of small companies".

Footsie constituents dominate this week's results schedule with Marks & Spencer's interim figures anxiously awaited.

Shares of the high street doyen have felt the chill winds of the retail downturn and now bump along at around their lowest for two years.

Nathan Cockrell at BT Alex.Brown is looking for a 16 per cent profits setback to pounds 380m.

At the time of last year's interim results the group announced a massive pounds 2.1bn expansion scheme.

Says Mr Cockrell: "M&S has some explaining to do if it expects the market to believe that its investment programme will generate long term returns".

There is also a little caution about Boots.

Its half year figures are likely to emerge at a scarcely changed pounds 255m.

First quarter retail sales recorded a like-for-like slow down in growth with the company attributing its performance to last summer's unfavourable weather hitting film processing and suncare sales.

The second quarter must have suffered much the same blemishes and it would be surprising if retail sales had not deteriorated further.

Associated British Foods is another company unlikely to produce excitement.

Year's results look like being around pounds 400m against pounds 426m.

The cash rich group will have been caught by the strong pound, a margin squeeze and a pounds 28m European Union fine.

Once regarded as a classic defensive stock ABF's safe haven status has looked a little suspect this year.

Unilever, the Anglo Dutch giant, will deliver third quarter figures and the market is looking for an advance from last time's pounds 831m, perhaps to as much as pounds 890m.

The underlying business will have done reasonably well but poor ice cream sales (that long wet summer again) and heavy promotional spending will take their toll.

BAA, the old British Airports Authority, is also on the quarterly treadmill - in its case the second three months.

A modest fall to around pounds 165m from pounds 173m would seem to be on the runway.

Among the likely constituents of the new All-Small share index serving up figures is the Old English Pub Co, an expansion hungry chain of pub/restaurants and country hotels.

The group has put through a string of deals since it first arrived three years ago and now has 112 coaching inns and 60 pub/restaurants.

The shares have been caught in the "downdraught" which has hit leisure shares as worries about the spending slow down have tormented the market. OEPC has been as high as 384p; the current price is 238.5p.

Still shareholders who were in at the start should not be entitled to grumble - they paid the equivalent of 49p.

Calculating interim profits is complicated by the acquisition spree; they could be around pounds 4m.