Phantom recession has little influence over equity markets

I’m indebted to the excellent article by Peter Kellner in last week’s New Statesman that flies in the face of Labour’s anti-Blairite, left-wing and pessimistic view that the British economy is teetering on the brink of a precipice. I won’t summarise it here, since the NS will want to protect its 2 cover price, but Kellner’s thesis is that we are considerably richer as an economy than we think we are.

Part of the reason for this is that we don’t include the booming black economy. Prostitution, for example, contributes some 1.2bn annually, raising the intriguing question, to my mind, of whether the economy is therefore more or less screwed than we think it is. Throw in illegal drugs and gambling and the sale of stolen goods and, apparently, we are underestimating consumer spending by 12.5bn annually, or by 2.6 per cent.

And it’s not just about the relative buoyancy of nefarious practices. Cost efficiencies in advances in information technology conceal the exponential prosperity that such technology is generating and, similarly, the rate of inflation may be severely overestimated.

If we used the same method to calculate our rate of inflation as the European Commission, UK inflation would be running at 1.4 per cent, rather than getting on for double that.

As I say, further detail here can only serve to erode the prosperity of the NS – and, heaven knows, its proprietor, Geoffrey Robinson, needs all the money he can get. But it does set one searching for further evidence of what I referred to here last week as the phoney war in equity markets, and the related phantom recession.

Look no further than the City over the past week. The NS’s traditional readership, of course, has no time for the City and consequently may need to be told that economic prospects are brighter than it supposes. The City already knows it – and I don’t say that because equity markets have remained doggedly inflated, though that is undoubtedly true.

The kinds of deals being struck at the moment appear to suggest that institutions (and rich individuals) are not much bothered about remaining liquid.

Note, for example, what has been developing in private equity markets. When venture capital institutions start to talk of their own shareholder value, then you can be pretty sure that equity has usurped cash as king.

True, Electra Investment Trust’s proposals of last week to wind itself up and distribute the proceeds to its shareholders were driven by its desires not to fall into the hands of its development capital rival, 3i.

And winding up an investment trust in order to deliver cash to shareholders is not the strongest of buy-signs in equity markets. But there is a lot else around suggesting that 3i’s attempted consolidation of giants in its sector says more about bullishness in equity markets than any of the contortions by Electra to avoid it.

Take the news this week that Unilever, the Persil-to-Birds Eye Wall’s packaged goods conglomerate, is to organise a share buy-back later this year worth 6bn. Unilever is expected to distribute as much as 2bn to its shareholders on both sides of the Atlantic by buying in shares through cash on its most recent balance sheet of some 5.8bn (probably nearer 7bn now). It must be said that acquisitions are hard to find for Unilever and, consequently, all that cash doesn’t have an alternative purpose.

But, as Arnold Weinstock always demonstrated at GEC, there are worse things than having loads of cash and you don’t have to return it to shareholders by buying your own shares. To do so is an act of folly or supreme self-confidence. Unilever chairman Niall FitzGerald doesn’t go in for folly.

Which brings me back to private equity. Note the speed with which venture capitalists at Cinven and CVC jumped in to take bookmaker William Hill off the hands of Nomura at the weekend for 825m when the planned flotation of the business indicated that the prospective price was too low. It looks to me as if underwriting institutions were either being too greedy or William Hill has some hidden holes in its balance sheet.

But the fact that venture capitalists, notorious in British industry for expecting swift returns, bit Nomura’s arm off at a premium and at short notice would suggest that they are far from nervous about the prospects of a company for which consumer spending is critical. Remember that venture capitalists look to their exit prices – so Cinven and CVC must have calculated that they can float or trade William Hill at a further premium not too far down the line.

Never judge a market by a single deal, it is said. So look around the leisure sector and what do we find?

A consortium of private-equity investors which I’m told includes Cinven preparing a 3.1bn bid for Rank Group. Take venture capital’s role in general – and Cinven’s role in particular – in the circumstances of William Hill and Rank and I think we have ourselves a trend.

This is the case for optimism. But there is one depressing aspect here. It seems that the venture capital industry and New Labour (as represented by the NS) have a view in common – that things can only get better. Cue cheesy music.

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