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Investment view

Gordon Brown must read Money Marketing – if the pre-release of taxation changes originally destined for the Budget statement in two weeks time is anything to go by. Not that there was much to get excited about. Half a billion pounds worth of tax concessions to the corporate sector was unveiled – or rather clarified. These measures had been trailed in earlier statements, so all the Chancellor was doing was clearing up loose ends before the end of the tax year.

As if a two-bite Budget was not enough, news has been plentiful, even though corporate Britain has largely shut down so far as company announcements are concerned. There are early signs that merger and acquisition activity is returning to the Square Mile. Whether it will be sufficient to prevent the widely expected second round of savage cuts is doubtful. Bonuses were not much in evidence for corporate financiers during 2001. In the end, head-count reduction is what really counts if departmental profitability is to return.

Corporate financiers will not have contributed much to the reorganisation of Britain&#39s rail network. The news that Railtrack shareholders will receive something appears at first sight to be a victory for the vociferous opposition mounted by the City. Shareholders will undoubtedly feel some sense of relief but it is too early to throw hats in the air.

Indeed, UK investors have little cause for celebration. Aside from even more bad news from Marconi – a once-great company that now qualifies as a penny share – the London stockmarket seems incapable of breaking out of the trading range that has constrained it for many weeks. My colleague Mike Lenhoff believes we should be concerned. According to the data he monitors, whenever the market has rallied, momentum indicators have failed to register an overbought position. This is bad news for bulls and suggests we should be looking at why we are failing to make headway.

The problem the UK market faces, according to Mike, is the high degree of concentration in specific sectors. Oils, pharmaceuticals, telecommunications and banks now account for nearly two-thirds of the market capitalisation of the FTSE 100 index – more than double the percentage in the late 1980s. The real problem is that these react to differing stimuli. In other words, you cannot expect them to move together. Indeed, the correlation has sometimes been negative, producing a kind of market gridlock.

This impinges upon volatility. As we all know, volatility is ever present but, in the case of the UK market overall, low volatility need not be beneficial. Volatility is most usually expressed in the stockmarket as a beta number. It is a relative measure, so you need to know what you are benchmarking against. Thus, constituent companies of the FTSE 100 index will have a beta number that will demonstrate how they are likely to move against the index as a whole.

The work that Mike Lenhoff has done relates the volatility of the London market to America. The reason behind this is simple – the US stockmarket is the most important in the world. However, the beta of the London market compared with America has fallen steadily over the last four years. This is good news in a bear market – you are likely to lose less in the UK – but in a rising market suggests a slower recovery.

By contrast, the beta for eurozone markets has been rising, suggesting a recovery in Wall Street could translate into a serious bull run on the Continent. Only time will tell, but it is food for thought at a time when investors are losing patience with a market that appears incapable of breaking out on the upside. The risks of being out of the market may still be as great as those of being in but it is clear that where you put your money for recovery will be particularly important.


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