Market view

The experts were agreed: Once the War in Iraq had started equities would rally. Until then they would drop like a stone. As it happened the markets second-guessed the experts, by starting the ‘war rally’ a few days before the conflict actually kicked off. So far the markets have held onto most of the ‘war rally’ gains. The net result is that despite having enjoyed a swing of around 600 points during the month the FTSE 100 ended 1 April at 3,684.78, just 0.0032 per cent higher than it closed on 3 March.

That is not to say that there were not a few horror stories. Speculation that it was about to go bust saw shares in Corus crash, which explains the poor showing by the steel sector. ICI and Canary Wharf served up horrid profits warnings explaining why chemicals and real estate stocks performed so badly. The truth is that in the real economy life is still pretty tough.

While the FTSE 100 swung wildly on war sentiment, investors’ concerns about the state of the real economy prompted an ongoing aversion to less liquid stocks. The FTSE 250 Index ended 1 April at 3.967.29 a fall of 2.64 per cent on the month while in small caps sentiment remains terrible. The FTSE Small Cap Index closed 1 April at 1,651.40, a net loss of 3.71 per cent on the month. And the poor old AIM Index ended the month at 542,39 a loss of 4.5 per cent.

Bad for bulls
As I write Allied troops are on the outskirts of Baghdad. It appears as if countless prayers will soon be answered and the war in Iraq will shortly draw to a close. As such we can then return to a peacetime market where equities are driven by economic and corporate fundamentals rather than the latest news from the front line. Unfortunately that might not be such good news for the bulls.

Distracted by the military campaign many market watchers seemed not to have noticed that the economic news flow of late has not be that great. On both sides of the Atlantic consumer confidence is weakening. This is not just a side-effect of the war. While personal debt levels remain at record levels; pensions and house-price timebombs remain unexploded and job insecurity remains an issue it isn’t hard to see why consumers might be feeling less than chipper. The war can’t have boosted confidence but it was not the cause of the problem nor will peace be the solution.

And if consumer confidence is weakening, business confidence and hence levels of capital investment remains firmly in the doldrums. The medicine of cutting base rates to the lowest level for 40 years just has not worked yet. Bulls hope that a speedy resolution of the Iraq conflict will bring crude prices down to a level that will really kick-start the global economy.

Some chartists and, to be fair, some industry insiders, are suggesting that the price of a barrel of Brent crude could slump from around $30 to as low as $12. Such a dramatic collapse in fuel costs would indeed boost the Western economies but it would bankrupt many in OPEC and it is hard to see the OPEC states committing economic hari-kiri just to bail out the Great Satan and his allies.

Adding to the reasons to be pessimistic are emerging signs of a credit crunch. As it happens UK corporates are significantly less heavily geared than their US and Euroland competitors. But even in the UK there are increasing signs of a tighter attitude to lending by the banks. We may have arrived at the point in the cycle where a fresh generation of lenders discover that not everyone repays their debts and in over-reacting send a good number of well-run businesses down with the bad.

Sums don’t add up
And in the UK there is yet another reason for gloom: tax. Both at a corporate and a personal level taxes (notably National Insurance) increased in April 2003 because of measures announced in April 2002 and will continue to increase because the Chancellor’s sums do not add up. A reduction in the free cashflow enjoyed by both business and individuals is not the most prudent of medicine for this point in the economic cycle.

In short, with the FTSE 100 trading at around 3,700, there are good reasons to be cautious on the outlook for corporate earnings and dividends and hence no rush to buy stocks indiscriminately. Shock warnings like that served up by ICI may grab the headlines but on an almost daily basis analysts are trimming and tweaking their estimates lower for a wide universe of stocks. At the start of 2003 some equity strategists were talking about average UK earnings growing by around 10 per cent this year. As the year progresses those estimates look as if they will continue to fall.

Meanwhile across the UK market average dividend cover is just over 1.5 times. That is way below what I would regard as a comfortable level. Companies can really only justify maintaining a dividend, which is less than twice covered for a couple of really bad years at the bottom of an economic cycle. Hence if earnings growth is going to be, at best, marginal this year it is hard to see that much excitement in the dividends department.

So shorting equities is a one-way bet? Life is never that easy. Sentiment will almost certainly be boosted by further base rate cuts on both sides of the pond. And meanwhile after three years of falling prices, at some stage some value must emerge. As the FTSE 100 has dipped to 3,300 (as it has done twice in recent months) a fairly superficial data trawl has revealed a good list of blue-chip companies with well covered dividends and solid balance sheets yielding 6 per cent plus. On a long-term view it is hard to believe that such stocks would be anything other than good investments. There is no rush to buy shares but on days when the FTSE really takes a beating there will be some attractive opportunities thrown up.

FTSE 100 INDEX

Stock	Value	Rank	Value	Rank
3i Group Inv Tr	87.5	92	53.53	78
Abbey National	86.07	95	34.46	94
Alliance & Leicester	100.06	47	90.44	16
Alliance Unichem	114.07	3	76.35	40
Allied Domecq	100.67	39	72.4	53
Amersham	95.47	74	54.1	77
Amvescap	95	77	29.42	96
Anglo American	100.52	43	79.84	38
Associated British Foods	97.14	65	98.38	8
Astrazeneca	105.32	15	63.96	64
Aviva	89.93	88	49.2	81
BAA	108.55	9	76.1	41
BAE Systems	101.82	30	34.56	93
Barclays	99.46	54	70.59	56
BG Group	98.76	58	80.27	37
BHP Billiton	96.06	68	81.88	32
BOC Group	100.73	38	74.04	49
Boots Group	97.88	61	82.45	31
BP	100.31	44	67.22	60
Bradford & Bingley Ord	99.74	51	90.7	14
British Airways	99.76	49	42.62	89
British American Tobacco	99.28	57	92.55	11
British Land	95.75	73	81.49	34
British Sky Broadcasting	99.68	53	75.3	45
BT Group	96.02	70	57.33	71
Bunzl	99.74	50	74.02	50
Cadbury Schweppes	104.36	18	69.7	57
Canary Wharf Group	60.92	100	38.33	92
Capita Group	97.33	64	57.19	72
Centrica	102.3	28	64.5	63
Compass	100.13	45	58.95	69
Daily Mail & General TA N/Vtg
Diageo	104.67	17	73.14	51
Dixons Group	92.93	83	34.13	95
EMAP	102.35	27	89.61	19
Exel	99.82	48	66.53	61
Friends Provident	86.16	94	40.66	90
Gallaher Group	101.06	36	118.07	1
GKN	107.44	11	49.72	80
GlaxoSmithKline	99.73	52	69.46	58
Granada	105.07	16	42.73	88
GUS	95.96	71	72.64	52
Hanson	103.53	23	59.89	68
Hays	107.64	10	44.56	86
HBOS	101.53	33	89.82	17
Hilton Group	96.05	69	58.51	70
HSBC Hldgs	97.76	62	83.81	28
Imperial Chemical Industries	62.35	99	28.03	97
Imperial Tobacco	101.46	34	89.7	18
Invensys	65.63	98	8.58	100
Johnson Matthey	89.71	89	71.54	54
Kingfisher	100.55	41	61.64	67
Land Securities	98.45	59	84.43	26
Legal & General	92.98	82	44.62	85
Liberty International	101.68	32	105.12	4
Lloyds TSB Group	90.96	86	48.58	82
Man Group	113.63	4	83.18	29
Marks & Spencer	92.31	84	75.17	46
MM02	94.21	80	65.57	62
Morrison (Wm) Supermarkets	112.26	5	84.7	25
National Grid Transco	94.98	78	85.27	24
Next	106.13	13	80.59	36
Northern Rock	96.36	67	95.21	10
Old Mutual	91.27	85	77.97	39
P & O Princess Cruises	103.57	21	87.12	22
Pearson	103.44	24	55.91	75
Prudential	95.78	72	46.62	84
Reckitt Benckiser	103.6	20	92.01	12
Reed Elsvier	97.52	63	67.5	59
Rentokil	95.08	76	62.63	66
Reuters Group	90.79	87	20.23	99
REXAM	109.37	8	75.67	43
Rio Tinto (Reg)	93.17	81	87.82	21
Rolls Royce	88.99	90	39.69	91
Royal & Sun Alliance	95.45	75	24.57	98
Royal Bank of Scotland	100.53	42	81.46	35
Sabmiller	101.28	35	83.94	27
Safeway	88.24	91	90.62	15
Sage Group	85.98	96	51.44	79
Sainsbury (J)	94.83	79	56.69	73
Schroders	115.78	2	55.66	76
Schroders Non Vtg	110.81	6	56.59	74
Scottish & Newcastle	100.82	37	63	65
Scottish & Southern Energy	102.68	26	98.42	7
Scottish Power	103.16	25	112.93	2
Severn Trent	101.7	31	103.42	5
Shell Transport & Trading (Reg)	104.01	19	75.46	44
Shire Pharmaceutical Group	117.53	1	70.99	55
Six Continents	98.39	60	86.75	23
Smith & Nephew	105.74	14	95.42	9
Smiths Group	107.41	12	81.87	33
Standard Chartered	96.63	66	91.66	13
Tesco	110.03	7	75.78	42
Tomkins	100.07	46	75	47
Unilever	103.53	22	106.77	3
United Utilities	99.32	56	103.17	6
Vodafone Group	99.34	55	88.33	20
Whitbread	100.58	40	83	30
Wolseley	102.2	29	74.33	48
WPP Group	87.27	93	42.86	87
Xstrata	82.96	97	48	83
Total Average (101)	98.35	-100	69.68	-100