Wembley spirit won't save us from Wall Street

City & Business
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The Independent Online
London's phlegmatic response to Friday's US non-farm payroll figures owes perhaps too much to the new-found Wembley/Wimbledon spirit that we are now prone to adopt in moments of adversity. While their US counterparts were seeking out window ledges and tall buildings as the Dow Jones Indust- rial Average plunged 114 points, our boys in the market were pluckily restricting the FT-SE 100's fall to just 17 points. That still represented a 46-point reversal from the day's high but was well off the bottom.

This resilience was interpreted in some quarters as an indication that London can weather the storm now brewing across the Atlantic. This is from the same school of wishful thinking that ultimately gave rise to the need for us to adopt the Wembley/Wimbledon spirit in the first place.

The problem for London is that Wall Street is now perfectly poised to secure the mini-crash it has secretly wanted for most of the year. So far it has rebounded from some quite sharp declines, notably the 171-point fall in March in the wake of - again - better-than-expected news on the jobs front. Buoyed by continued enthusiasm for equities from the retail sector, the US stock markets have steadily progressed to new highs. Significantly, however, those highs were reached over a month ago, and the markets have drifted since.

This inertia provides the requisite backdrop for an extremely sharp correction. That correction is made all the more likely by the mood on Wall Street, which is resigning itself to a rise in interest rates. The job data on Friday was simply too strong to be ignored by the Federal Reserve, which chose, ironically, to leave interest rates unchanged on Wednesday. Given the determination of Alan Green- span, the Fed chairman, to nip any signs of inflation in the bud, he will be hard pressed to argue against a hike. Not only was the increase in employment much greater than had been anticipated, but more intriguingly the increase in hourly earnings was the highest since records were first kept more than 30 years ago.

Rising wages equate with rising inflation. The question already being asked is not will Mr Green-span order a rate rise, but when.

It was the anticipation of that rise in New York on Friday that sent bond prices falling and yields rising to their highest level since early 1995. What is more disturbing is that this panic was engineered by a skeleton market. Most traders were creating a long weekend out of Thursday's Independence Day holiday and even those who went to work only had to do so for the morning session.

Traders returning from their break tomorrow will be distinctly nervous, aware that when interest rates were raised in March 1994 it heralded the beginning of a 10 per cent decline in share prices. If history repeats itself, Wall Street is staring a fall of around 500 points in the face.

The key question is whether the retail investor will come to the rescue once more. This support cannot be taken for granted. Higher interest rates make alternative investments more attractive. More significantly, the high-tech sector - which has generated so much investor interest - is going through a sticky patch. Indeed, technology stocks have been sliding since Tuesday over concern about the sector's ability to maintain profitabilty.

This all suggests a correction that not even the Wembley/Wimbledon spirit will be able to resist.

City evolution needed

THE Worshipful Company of Purveyors of Old Rope (aka the big City institutions) have still not woken up to the fact that they must contemplate as a matter of urgency changes to the system of raising equity in this country. Neither eloquent argument nor the threatened use of blunt instruments by the regulatory authorities has prompted any great public enthusiasm for changes to a system that has its foundations in pre-emption rights and fixed underwriting commissions.

This would be easier to understand if those who have identified the need for change were proposing some radical shake up. They are not. Rather it is argued that the equity-raising regime would benefit from evolution not revolution. As long as Britain remains committed to a system that results in a higher cost of capital than is found in other markets, it inhibits our ability to improve the British economy's growth rate. It also puts at risk London's status as a financial centre. Without a flexible approach to raising capital, there is a risk that its pre-eminence will be challenged by markets that recognise the importance of providing choice.

Nobody is talking about abolishing the London system. Rather it is suggested that it should be adapted to incorporate its best attributes alongside the best elements of the US system. The aim would be to tailor the equity raising to the needs of the company rather than those of the capital provider. Such an approach would still allow for coventional discounted underwritten rights issues but would also make room for deep discounted rights issues and non-pre-emptive rights issues at near market value as well as book building issues.

Change can be uncomfortable, but that is no reason to ignore the need for it. Unless the City can agree to a new set of principles, the Office of Fair Trading will intervene with a Monopolies investigation, which is more likely to produce irreversible revolution than controllable evolution.

Saving and spending

IT IS rather cruelly suggested that Lord Weinstock's rigorous attention to cash conservation at GEC was inspired by Vivian Nicholson. It was she who captured a nation's imagination in September 1961 with her promise to "spend and spend and spend" after her husband had netted a pounds 152,000 pools win from his farthing stake.

A little over a year later, Arnie Weinstock was appointed managing director of GEC, a post he will relinquish later this year after 33 years at the helm. Noting the dangers of Mrs Nicholson's approach, he reverted instead, it is said, to a philosophy of save and save and save.

There is little doubt that Mrs Nicholson was cursed with misfortune. But neither have GEC shareholders been blessed with equal and opposite benefit. By saving when he might have been spending, Lord Weinstock perhaps missed opportunities to invest for growth.

When George Simpson takes over from Lord Weinstock at GEC in September, he must realise that the two philosophies are not mutually exclusive.

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