Balanced View: Intelligent Discussion of Market Trends

From todays Times

January 01, 2004

Business Commentary

Telling tales from the tea leaves
By Robert Cole



MAKING predictions is a mug’s game. It should be left to astrologers, tea leaf readers, overpaid City analysts and other charlatans of nefarious intent. But it is fun. So here goes.



As soon as next week the nation’s retailers will be heard wailing and gnashing their teeth. They will be obliged to own up to having experienced dismal trading conditions over Christmas. There will be notable exceptions, but the ensuing share price slumps will bring venture capital buyers out of the woodwork offering to put current owners out of their misery.

Shares in Canary Wharf, owner of the East London office development, will drift lower as putative bidders continue to squabble with themselves and the management team about the merits of a takeover. British Land, in one of the first moves orchestrated by Nick Ritblat, its new chief executive, will enter the fray and be taken seriously because it will propose an all-share deal that will leave Canary stockholders with the chance to share in all the future upside.

In the second third of the year, however, clear evidence of a recovery in the commercial property market will emerge, add a steely quality to the backbone of independent shareholders, and put the kibosh on all bids. British Land will end up finding itself scrutinised as a takeover target.

Reluctantly, Lord Black of Crossharbour will sell The Daily Telegraph in a management buyout backed by Candover, the venture capital group. Richard Desmond, of Express newspaper notoriety, will make life difficult for the new owners by taking control of the West Ferry printing plant it shares with the Telegraph. But Mr Desmond’s ambitions will be thwarted by the Establishment, and objections raised by Ofcom, the media regulator.

The huff and puffing over the £20 million option deal at Londis, the distributor to 2,000 corner shops, will find resolution with the installation of an all-new management team which will refuse to see the group sold to a trade buyer. By the year-end Londis will have joined a long line of smallish, but still substantial, businesses that declare intentions to float on the London Stock Exchange.

A major British bank will be acquired by a US financial giant. It might be Barclays, and the competition authorities will not block the deal. No one will care.

Blessed with some IPO proceeds, but suffering a shortage of new investment targets and a rise in borrowing costs, venture capitalists will quietly begin to to hand back money. Investors will see the terms TMT and Ebitda dusted off and used in the attempt to flog companies out of venture capital hands. But investors will laugh, and be interested only in companies with strong free cashflow and progressive dividend policies.


There will be a Cabinet reshuffle following the conclusion of the Hutton inquiry. It will see see Patricia Hewitt, the Trade and Industry Secretary, moved and replaced by Mike O’Brien, the current Minister for Trade. Steam will be seen gushing in ever greater quantities from the ears of Gordon Brown, but he and Tony Blair will remain in their current jobs.

Amid vociferously expressed opinion that he has mucked up the public finances and will be forced to raise tax, Mr Brown will tough it out through to the general election and hope that above-trend growth will deliver a recovery in tax receipts. The March Budget will contain only modest tax increases, pushed through in the usual stealthy manner. Better-paid employees who have made sensible private provision for pension income will be appalled to learn that their prudence will be rewarded with a mild, but annoying, fiscal kick in the shins.

Gus O’Donnell, the Permanent Secretary to the Treasury, will unveil plans to merge the Inland Revenue and Customs and Excise. The BCCI trial will start and pour embarrassment by the bucketload on the Bank of England. The legal proceedings will drag on and on but find no clear resolution, not in 2004 anyway. Lawyers across London will be found hiding broad smiles and bulging wallets as they trouser their slice of the estimated £100 million costs of the action.



The US dollar will continue to slide through the first quarter of the year, fuelling fears that it will derail global economic recovery. But a strong economic performance on the other side of the Atlantic will arrest the decline before a quid will buy two bucks. The Federal Reserve will signal an intention to move interest rates up in the spring. But if any actual rises come before the presidential election, they will be small. The rise in the value of the euro will put pressure on the European Central Bank to cut eurozone interest rates in the first half. But, conscious of the anaemic economic recovery on the Continent, it will dig in its heels and content itself with keeping rates unchanged for most if not all of 2004.

The UK base rate, meanwhile, will rise from 3.75 per cent and all but close the gap with the yield on government bonds, now 4.8 per cent. Gilts will trade at prices which are broadly unchanged as increased issuance obviates the upward pressure exerted by the tightening interest rate environment. Gold will also fall in price. It currently trades at $415 per Troy ounce but you will be able to buy an ounce-sized nugget for $350 this time next year. Brent crude oil will spend most of the year trading at the upper end of a $26.23 to $34.72-a-barrel range as fears of terrorist acts dog users and traders. Global recovery will help to stimulate demand for oil and keep its price bubbling.

UK share prices will breach the 5,000 mark in May but investors will sell and go away, not coming back until St Leger day in mid-September. By the year-end, the FTSE 100 will have risen 8.7 per cent to 4,866.4. The Dow Jones industrial average will march upward to all-time highs. The more broadly based S&P index, however, will not break new ground. Both indices will end the year a couple of percentage points lower than today, largely because investors in US equities begin to fret about the paucity of dividend payments.


Vodafone and its three principal UK competitors will launch third-generation mobile services in September. The video service will disappoint initially, attracting very negative media coverage, but as the year draws to an end it will show it has the ability to impress consumers and relieve them of hard-earned cash. Telewest will complete its drawn-out £3.5 billion financial rescue in the spring, which will promptly lead to a year’s worth of speculation about a merger with its cable rival NTL. But nothing will happen as both sides are too bombed out to risk a deal just yet.

The name Virgin will be dropped from trains as Sir Richard Branson tries to stop the damage being done to his brand name and re-orients his empire back to entertainment. Terry Smith, the former boxer who is chief executive at stockbroker Collins Stewart, will offer to call off his high-profile libel action against the Financial Times over lurid allegations made in the paper by a former colleague about his firm’s past conduct. Instead, he will invite Andrew Gowers, the FT’s editor, to do three rounds with him in the ring. The FT will elect to fight the libel action.

Mike Parton, the chief executive of Marconi, will hit his three remaining bonus targets after selling the recovering telecoms equipment maker’s non-core US operations. He will earn a total bonus of about £21 million, prompting complaints from old Marconi shareholders who watched as investments worth £35 billion faded away to next to nothing.


The EU will launch an attack on the tax status of the Cayman Islands, citing Parmalat as its cause for war. China will revalue its currency against the dollar, but not by very much, leaving its exports super-competitive. China will continue to dominate much economic debate. Sars will raise its ugly head above the parapet again and spoil the picture temporarily. But it will be trounced by concerted health authority action.

In the US, the powers that be in Washington will indulge in protectionist rhetoric against China. Meanwhile plenty of white collar jobs will be exported from the UK to India. The heads of the companies involved will explain why it is good for the British economy to pay wages abroad while throwing people out of work here. But as increasing numbers of increasingly senior jobs begin to be exported, the justification will be couched in more and more nervous tones.


At home the Government will enforce the EU Working Time Directive, and seek to ensure that London-based financial firms, in particular, adhere to a 35-hour working week. City slickers will comply by ceasing to make forecasts. Financial journalists will follow suit.