Few bargains to be had among blue-chip losers

The worst performing FTSE 100 shares since the terrorist attacks on the United States on 11 September will remain in the doldrums in the short term, but are unlikely to lead to a high profile bankruptcy, according to a poll of the City's leading equity strategists.

They say that stock market strugglers such as Invensys, Rolls-Royce, British Airways and ICI have not necessarily been oversold, since they rely on business investment, which is expected to remain under pressure for some time. They add that the current sell-off is not a rerun of spring 2000 when out of favour stocks (in that case, Old Economy companies) slumped on sentiment grounds, rather than anything to do with fundamentals.

As Tony Jackson, equity strategist at Charterhouse Economics, put it: "That was a manic switching out of one type of stock to buy another. This is different."

The biggest worry for investors in these companies is that the British government is considered highly unlikely to intervene to prevent a big name, such as Marconi, collapsing. However, the value of investors' shares in some of these companies could become virtually worthless as a result of rescue refinancing deals.

Steve Russell, a UK equity strategist at HSBC, says: "In the short term it is difficult to make a case that some of these stocks are just oversold. However, you could say that the media stocks [such as United Business Media and Granada] will have a horrific next quarter but are not at financial risk and there is a high chance of sector consolidation.

"BA is probably a bit of a special case. It probably is oversold, but it's difficult to have a positive stance on the airlines anyway. Royal & Sun Alliance has ongoing difficulties and could get taken over. As for Invensys and ICI, this quarter will be horrific but I don't think they are financially threatened." But Mr Russell was more bearish on stocks such as Colt Telecom, which have cash problems. "If a company has cash-flow problems and needs to raise money just to avoid going bust, it's probably best to steer clear of them completely."

Tony Jackson at Charterhouse Economics said: "A company doesn't need to go bust for investors to see their equity value wiped out." He refers to the collapse of Brent Walker leisure chain after the 1987 crash when the value of the equity was rendered worthless despite the company staggering on for years. He says shareholders are unlikely to be rescued by takeovers. "There may be paper bids, but would the market want to swap one bit of paper for another? And who would do a deal for cash at the moment?"

Mr Jackson's view is that some telecoms strugglers could get taken out by buyers from outside the sector such as venture capital firms.

Dhaval Joshi, a global strategist at SG Securities, says the outlook is bleak for the current strugglers. "A lot of them are business investment plans and the outlook for that is poor. Until that changes we won't see a pick up and it is the consumer that is likely to lead the recovery anyway.

"In other circumstances you might have seen other companies step in and pick up these assets cheaply.

"But with such lack of visibility it is not a very good environment for mergers and acquisitions because you can't value anything."

The best performing stocks in the FTSE 100 since 11 September have been Vodafone, GlaxoSmithKline, BAE Systems and Tesco. Going forward, SG Securities' Mr Joshi said he was looking at banks, pharmaceuticals and some of the UK consumer companies.

Mr Russell, at HSBC, said some financial groups such as Amvescap, Schroders and Close Brothers were interesting. "In the longer term they look ridiculously oversold and could see hostile takeovers if they don't show recovery."