George Pitcher: Let the end of the boom mean an end to the bull

A falling stock market doesn’t have to be all doom and gloom. In fact, it could be a golden opportunity to try out a new kind of corporate activity, says George Pitcher

One cheery aspect of a downturn in the markets and the prospect of recession is the disappearance of the dreary market enthusiasts so symptomatic of a booming economy. The global meltdown of 1987 sent the red-braced hoorays scuttling away from the City to set up horse-tack franchises in Devizes, or similar.

One of the best indices of the shift from the flakes of the bull market to the bricks of the bear market is the demise of contemporary whiz-kid jargon. In the mid-Eighties, you could hang out in any City champagne bar and listen to Henrys drawling about their latest “serious piece of kit”. It’s a blessed relief that the newest BMW sports coupe is these days simply a car, rather than a serious piece of kit.

During the bull years of the Nineties, after John Major’s government had brought us greyness and Black Wednesday, the language was less that of conspicuous consumption, but was just as shallow in its managerial pseudo-intellectualism. We were enjoined “to think the unthinkable”, “to talk blue sky” and “to think out of the box”, whatever the box may be.

In fact, as Lucy Kellaway observed in the FT at the start of this week, “companies would be well advised to get right back into that box, and sharpish too.” I can see those earnest high-flyers, in telecoms and IT, as they face those they have to make redundant, with the prospect of their own unemployment perhaps not too distant, explaining that they’re very sorry, but they have to think inside the box.

I argued last week that London, and perhaps the whole of western Europe, could avoid a recession precipitated by a share collapse and the consequent loss of corporate earnings if only we grew up a bit and stopped following the Far Eastern markets in the morning and Wall Street in the afternoon. I’ll now go further. Not only can we avoid a US-style recession: corporate activity may actually benefit from a market devoid of bull-headed, index-tracking idiots.

The first justification for this rather unnatural optimism is that the recession for which we’re apparently heading is a very different one from that over which Major and his Chancellor, Norman Lamont, presided so comically. A decade ago, Britain was tied to an exchange rate mechanism that made us slaves to interest rates, unemployment was still well over 2 million and inflation was still a real and present danger. Now unemployment is back in six figures and interest and inflation rates are low and heading lower (unless, of course, the recessionary lunatics take over the market asylum again).

As WPP’s Martin Sorrell is reported to have said, what we are witnessing is “the revenge of the brands”. He was talking about falling ad revenues in the US, as a consequence of the demise of dot-commery, but his point could be a broader one: we’re returning to an old economy model – and the old economy is in good nick. We should be thinking inside the box.

With the economy relatively robust and share prices increasingly cheap, the opportunities for corporate consolidation look really very rosy. Traditionally, such consolidation occurs at the top of markets. Companies are awash with cash on their balance sheets, need to find further earnings from somewhere and fear that they lack enough to rationalise when the economic cycle turns against them. So takeover fever is usually associated with booming, over-inflated markets.

But what about the booming, under-inflated environment that we could be entering? I don’t mean that we’re booming in the stock market sense, but that’s only the narrow definition of the bull-market thickos in any event. What we have is reasonable growth prospects, low and lowering interest rates and cheap stocks.

It follows that the shrewd and gutsy corporate engineer could be well advised to seize potential earnings at or near the bottom of the equities market. And one sector in which it could happen is food retailing.

This sector is historically resistant to stock-market downturns, the reasoning being that while we might not trade in the car or buy new computer software, we still have to eat. The word is that Sainsbury’s chief executive, Peter Davis, who is reshaping the retailer to compete more effectively with Tesco, might put in an offer for Marks & Spencer.

Any such move would provide Sainsbury’s with tremendous expansion potential for its Central and Local high street outlets, as well as re-establishing it in premium food retailing through M&S’s professional lunchers and diners. Sainsbury’s has never been big in clothes retailing, but it would acquire the services of George Davies through M&S and, arguably, Davies is more suited to Sainsbury’s mentality – after his hugely successful clothes franchise with Asda – than he is to M&S’s management.

In any event, Sainsbury’s could hardly make a worse job of clothes retailing than M&S has recently, and the upside on food and location could prove irresistible. It would be a deal that would provide much-needed confidence in UK markets – but it’s one that needs Davis, if you don’t mind me saying so, to think out of his lunch-box.

George Pitcher is a partner of issue management consultancy Luther Pendragon

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