Why the City won't rest easy until Footsie has taken a battering

the week ahead
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The Independent Online
The stock market must soon run out of enthusiasm. It's overheated; overvalued. That is the view of many City professionals who talk ominously of a correction, even a crash.

Equities are prone to a variety of influences; some of them far from rational. There is a haunting fear there is something special about next month's 10th anniversary of the dramatic 1980s meltdown and shares will conspire to acknowledge the event with a suitable decline.

Such superstition should be preposterous. But it would be foolish to ignore it; the market is quite capable of talking itself into retreat.

Allan Collins, at private client stockbroker Redmayne Bentley, sums up the mood of many in his latest bulletin. He says: "It's long overdue, everyone is waiting for it, expecting it, talking about it; it could happen at any time but it doesn't come." He is referring to the feared correction and says that "volume has dried up since the fund managers unpacked their suitcases - they are on a buyers' strike, fearing a sharp fall in prices".

Many fund managers have failed to adjust to this year's bull run. A reverse would settle their nerves. Mr Collins says a correction is a fall of more than 7 per cent from a peak. He has calculated the average correction since 1980 at 12.5 per cent. So, assuming Footsie peaked last month, an average retreat would take it down to 4,460 points. The last setback, an 8.6 per cent fall, was three years ago.

Mind you, bear markets were much more prolonged in years gone by. The infamous one in the early 1970s lasted a miserable 30 months; it represented a 72.9 per cent fall. The 1987 crash, spread over not much more than a month, was 34.4 per cent.

Bells do not, of course, ring when a bull market is over. But there has to be a trigger. Observes Mr Collins: "It clearly isn't enough to say that the market's overvalued - Wall Street has been overvalued on traditional historic yardsticks for more than two years and the UK has now got to a level where, on some measurements, it is more expensive than before the 1987 crash and before the 1994 bear market."

He feels the cataclysm could come from overseas - "perhaps a rise in American interest rates sending an overvalued Wall Street down to lower levels, or perhaps the kind of turmoil we have seen in Far East currencies and markets over the last few weeks".

But the Redmayne man is still relatively positive. He feels London equities are more modestly valued than those overseas and there are three important influences which should encourage stability.

Institutions, he points out, are piling up their cash hoards; not many new shares are being issued and directors are buying shares in their companies at an astonishing rate.

He says: "This is in complete contrast to the situation ahead of the falls of 1987 and 1994 when cash levels were low, rights issues and new issues were rampant and UK directors were avid sellers of their stock."

So, after a near-term "breather", as Mr Collins puts it, the equity outlook "is reasonably positive".

Richard Jeffrey at Charterhouse Tilney is one strategist looking for a setback - as much as 10 per cent. He does not mince his words. He says: "What is it that makes a rabbit think it can out-stare a 30-ton truck? The financial markets seem almost oblivious of the problems building up in the UK economy. If the economy is not overheating already it is on the brink of doing so and this cannot be good for either equities or gilts."

Footsie was on the side of the bulls last week. At times it seemed intent on challenging its 5,086.8 peak and more than recovered ground lost in the previous week.

The results deluge which dominated last week's activity slows to a much more gentle flow this week. Tomorrow Guinness rolls out its last figures as a separate company - always assuming the tangled deal with Grand Metropolitan goes ahead and creates the pounds 24bn GMG Brands cocktail, the largest the world has witnessed. But it is unlikely to go out in a blaze of profit glory.

Interim profits are expected to be a decidedly flat pounds 355m, down from pounds 357m. Currency influences have taken toll ofbrewing and spirit profits although chairman Tony Greener is expected to point to a modest recovery in spirit sales.

Builders are in evidence with the likes of Barratt Developments and Beazer in the frame. Barratt should manage pounds 67.5m (pounds 52.1m) and Beazer pounds 58.5m (pounds 46.5m). Redland, the building materials group, also reports. Its interim profits could come out at pounds 90.5m against pounds 81.5m.

Retailers Laura Ashley and Sears have interim results. They will be poor.

The flouncy frocks chain has warned it will do no better than break even this year and Sears is likely to be pounds 6.5m in the red against a pounds 16.8m profit.

Eurotunnel reports today. It is likely to produce a half-year pounds 300m loss against a corresponding loss of pounds 371.7m.