Fear of ‘double dip’ haunts global markets

Author: By Simon Evans

London’s benchmark FTSE 100 index shed 2.5 per cent from Tuesday last week, while America’s index of its biggest companies, the S&P 500, slumped by 1.6 per cent in the past four days.

The FTSE dipped on Friday amid fears that Britain’s biggest travel firms, Thomas Cook and Tui, which have performed strongly in recent times, may have to tap investors for more cash with rights issues.

This Tuesday, two days ahead of the US’s Thanksgiving closedown, the strength of equity markets will be further tested when key consumer confidence figures are published across the Atlantic. A downward revision of US growth numbers, which last month showed its economy edged out of recession in the third quarter of the year, is also likely to further spook markets already fearful of a so-called “double dip” recession.

Fears of a fall in equity prices grew last week when Crispin Odey, one of the City’s most successful fund managers, ended his bullish stance on equities, revealing he had slashed his exposure to equities fearful of a fall in prices. In a letter to investors, Mr Odey, whose fund lost more than 10 per cent of its value in October but remains more than 30 per cent in the black this year, said: “October proved to be painful. We witnessed the first correction in markets since June. We used the decline as a dress rehearsal for an aggressive change of tack in our portfolio and ended the month with nearly half the net exposure to equities that we had at the beginning.”

Mr Odey scooped millions betting that financial stocks would recover value in the wake of the credit crunch.

Also on Tuesday, Lloyds Banking Group, which has seen its share price jump by 140 per cent since March, will announce the final terms of its bumper £13.5bn rights issue. The issue has been underwritten at a massive 90 per cent discount to Friday’s closing share price of 88.15p but analysts predict that the likely final rights price will eventually come in at around 40p.

However, the focus this week will largely be on the performance of Britain’s water companies, whose share prices are expected to be hit by confirmation of a ruling from Ofwat, the water regulator, that will see prices cut. Peter Atherton, a utilities analyst at Citi, said: “We would hope that Ofwat will have moved on from the July draft and be more acceptable to the listed suppliers, which might otherwise be forced to cut dividends. If Ofwat’s position has not moved on, it is more likely that the suppliers will appeal to the Competition Commission.”

Analysts at Goldman Sachs expect that if Ofwat’s final ruling is close to the draft, United Utilities, on Wednesday, and Severn Trent, which reports on Tuesday, will “likely need to cut their dividends by 20 per cent”.

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