Smaller Companies: Clarke Foods leads the casualty list

IT has been a tough year for smaller companies, but 1992 is closing on an optimistic note.

Back in January there were tentative hopes that the sector's underperformance since 1989 would end with the recession. It turned out to be another false dawn. Despite a Conservative election victory, the recession continued to deepen during the year, driving investors away from smaller companies.

High interest rates, mounting unemployment and lack of consumer spending hit tiddlers hard, because they are highly dependent on the UK economy. Many companies were also squeezed by a combination of high debts and falling profits.

The year witnessed many corporate collapses in the quoted sector. Small companies dominated the casualty list, and those pushed into receivership include Mowat, the property and holiday company; Halls Homes & Gardens, the conservatories maker; Trilion, the video services group; and WB Industries.

Perhaps the most spectacular collapse was that of Clarke Foods, the ice-cream maker. It began the year with high hopes - just 10 days into 1992, Clarke announced the pounds 9m acquisition of Lyons Maid, Britain's second-biggest ice-cream brand, from Allied Lyons, the food and drinks giant.

The deal, financed by a rights issue at 60p a share, caught the market's imagination. There was much City talk that Henry Clarke, chairman, would take the ice- cream market in Europe, not just Britain, by storm.

Mr Clarke, an American, made a fortune by selling Klondike ice- cream bars in the US. Many believed he would apply his sales magic at Lyons Maid.

Propelled by the hype, Clarke's shares soared away to a 168p peak during the summer, valuing it at more than pounds 120m.

But the dream melted away in a blaze of production and marketing problems. Two months ago receivers were sent in to the group and the company's assets and brand name have since been gobbled up by Nestle, the Swiss multi- national.

The year will also be remembered for the death of the Unlisted Securities Market, the Stock Exchange's second division. Although the final rites will not be given until next spring, its abolition has been recommended by the authorities.

The USM become a potent symbol of the 1980s boom. During its 12 years, it spawned many of the glamour stocks of the decade and transformed hundreds of entrepreneurs into paper millionaires overnight.

But its popularity has been in decline since an EC directive two years ago and high costs of flotation eroded the benefits of a USM quote. As a result, there has been a widespread belief among City professionals that it should go, but many are keen to see the establishment of a new platform for small companies to enhance their image and visibility.

The year also saw a further erosion of the City's market-makers and research capacity in second and third-line stocks. Warburg Securities struck more than 300 stocks from its market-making book, while County NatWest substantially reduced its market-making and research in the sector. This month Bikuben Whitefriars threw in the towel, shutting down its securities operations in the City.

The withdrawal from the sector reflected low trading volumes and lack of interest in smaller companies. Ironically, the cuts have come at a time when investor interest is returning to the sector. Although the Hoare Govett Smaller Companies index underperformed the FT-SE 100 by about 13 per cent this year, second-line shares have seen a strong advance since Black Wednesday. Thanks to a 20 per cent rise since then, the HGSC index is ending at almost the same level as it started the year.

The 3-point cut in interest rates following Britain's withdrawal from the European exchange rate mechanism has renewed hopes of an economic upturn. Lower interest rates are likely to improve consumer spending and relieve the strain on company balance sheets.

As a result, the sector could be heading for a strong advance in 1993. This month alone, the HGSC index has gained 7 per cent, well ahead of the Footsie's performance.

However, it is still unclear whether the sector will outperform blue chips.

According to Jim Stride, investment guru at Sun Life: 'Next year will be a better year than this but the lingering effect of the recession will remain. Quite a lot of small companies need to raise new funds to relieve their balance sheets and this could restrain share prices.'