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Talking up the market

Khuram Chaudhry, European equity strategist (UK), Merrill Lynch

The seriousness of the lack of investor confidence depends on the class of investor. Where private investors are concerned the lack of confidence is quite serious. If you look at company directors they are quite bullish. Institutional investors are somewhere in between.

Directors are starting to buy a lot of their own companies’ shares. There are a number of reasons for doing this, not just to inject bullishness back into the market. One reason is that directors have to part with their own cash, which is a strong signal to the markets. Directors also feel their companies’ shares are undervalued and they are taking advantage of low prices to build on their assets.

Alex Cohen, securities lawyer, Latham and Watkins
I certainly hope that Sarbanes-Oxley is going to restore investor confidence but, of course, no one piece of legislation can do that single-handed. But, if you think about it, the act has three main thrusts. It puts CEO and CFOs personally on the hook for their companies’ financial disclosure, making them certify their accounts. Secondly, it re-shapes the relationships between companies and auditors by prohibiting the provision of a lot of non-audit services. Finally it beefs up the SEC’s powers.

It strikes me that many investors in the US have requested all three of the things for some time, especially auditor independence. So I think that by addressing these concerns the act has real potential to help the markets. If it makes investors confident about financial disclosure that has got to be good – disclosure is the x-ray into the financial guts of a company, and without it you are lost.

Martin Jackson, finance director, Friends Provident
As far as company accounts are concerned there have been no real problems in the UK and the US deadline for filing has been and gone without any major headline problems. Hopefully, we can put this issue to bed and get on with our jobs. Saying that, tomorrow we might get another big shock. Who knows? But the markets are certainly fragile and investor confidence has been hit. That is still working its way through the system.

On a positive note, the UK economy is good, inflation is low and under control, and the government is spending money. And there is no better time to invest in equities than in a depressed market. That message is a difficult one to communicate, however, because everyone is trying to second-guess where the bottom of the market is. “Cautiously optimistic”, that’s our current standpoint.

Mark Armour, chairman, 100 Group of Finance Directors
It is clearly in everybody’s interests to see confidence in the equity markets restored.

UK boards are already required as a matter of law to present accounts that show a true and fair view, and to sign the accounts accordingly.

Certification, as required by Sarbanes-Oxley, should not therefore be too difficult a step. However, there is concern that UK accounting regulations will be dictated from the US.
(Quoted in Financial Times, 19 August 2002)

Tony Dye, founder, Dye Asset Management
I don’t think market confidence is very important because the majority of UK business doesn’t directly rely on the stockmarket. On a return to bullishness, that is a huge question. The market is struggling to come to terms with the bubble it has experienced and I feel shareholder confidence is still too high. I think the markets will experience difficulties for some time and I personally doubt the worst is over.

Dennis Turner, chief economist, HSBC
With equity markets in such a fragile condition and growth prospects in the US uncertain, I can well understand why there is such pessimism about the short-term outlook. But if people step back and look at the fundamentals of the British economy, they will see that this is not 1974 or 1989 revisited.

Today, the UK can boast the lowest inflation in Europe, the highest employment level in our history, an unemployment rate not seen for a quarter of a century and a government with a healthy fiscal surplus. This rare combination gives policymakers the flexibility to steer us through the current turbulence.

Although already at a 40-year low, interest rates could go even lower without taking any risks with inflation, while the Chancellor’s spending plans look likely to fill any gap left by a nervous private consumer.

Growth may wobble a bit in the coming months and disappoint on expectations at the start of the year, but it seems to me that the basics of the UK economy are in good shape. Of course there are risks, but the biggest is probably that we talk ourselves down. If people believe there will be a recession and behave as though there will be a recession, it becomes a self-fulfilling prophecy. From where I sit, these fears seem unjustified.

Howard Davies, chairman, Financial Services Authority
We cannot afford to be complacent, even though our accounting standards are different from those in the US, and the approach taken by accountants here is in a number of respects to be preferred. We also have a greater degree of independence built into our regime for accounting and audit oversight. Nonetheless, the prudent assumption is that it could happen here. If, that is, by “it” one means a fraudulent attempt to inflate earnings for personal gain.

So it is right for us to look at our regime, to see whether improvements are required. But while “it” could happen here, so far it hasn’t.
(FSA AGM speech, 18 July 2002)

Co-ordinating Group on Audit and Accounting issues
We recommend that the Financial Reporting Review Panel should press ahead urgently with developing a pro-active element to its work and come forward with specific proposals by the end of 2002 … The government should look at the adequacy of the current enforcement regime in the UK in a wider context, and take into account international developments.
(Interim report, July 2002)

Richard Raeburn, chief executive, Association of Corporate Treasurers
Traditionally, the acid test for a finance director was whether he or she could confirm that they understood what was happening within treasury: in that sense the buck stopped with the FD and it should in principle be a sackable offence if things were going on within Treasury that the FD didn’t understand.

The increasing concern about the quality of governance has shifted the playing field and it’s now a non-executive director’s responsibility to confirm that, if there is a black box, it’s effectively transparent. That puts a tremendous burden of responsibility on non-executive directors to raise the game in terms of their competence to understand risks and risk management. The amateur non-exec will clearly have difficulty in the new environment.

Senator Paul S. Sarbanes, Democrat, of Maryland. Co-author of the Sarbanes-Oxley Bill Unless we come to grips with this current crisis in accounting and corporate governance, we run the risk of undermining our long-term world economic leadership.
(Introducing Sarbanes-Oxley, 9 July 2002)

President George W. Bush
The business pages of American newspapers should not read like a scandal sheet. The American economy today is rising, while faith in the fundamental integrity of American business leaders is being undermined. Nearly every week brings better economic news, and a discovery of a fraud or scandal.

Stock analysts should be trusted advisers, not salesmen with a hidden agenda. We must prevent analysts from touting weak companies because they happen to be clients of their firm for underwriting or merger advice.

This is a flat-out conflict of interest, and we’ll aggressively enforce new SEC rules against this.

Self-regulation is important but isn’t enough. In the long run, there’s no capitalism without conscience; no wealth without character.
(From statement to Wall Street, 9 July 2002)

Gary Tipper, director private equity, Aberdeen Murray Johnstone
We are not very affected by movements in the stock market because we are in private equity, but saying that we have seen the lowest level of deal activity at Aberdeen Murray Johnstone since I joined in 1993.

The markets don’t have a massive impact on people’s decisions to raise money through private equity. But where we do see an impact is in general confidence. People are waiting six or nine months before they sell their businesses, looking to see what is round the corner.

Because of the sector we operate in we are still seeing plenty of opportunities. Look at the macro factors – the economy is still strong. Compare that to ten years ago and we are doing very well. For some reason, there is a general confidence problem. Maybe everyone is waiting on what will happen in the US.

I’m not worried, confidence will return.

John Hawksworth, chief macroeconomist, PwC
Clearly, confidence is low in the equity markets but I do not think that means the economy as a whole is going into recession because the relationship between the stockmarket is not all that strong, especially in the UK.

One shouldn’t get too pessimistic about the economy, even if the markets are suffering.

The government has done a fair amount to boost the economy through additional spending plans. But I don’t think the government can directly influence the equity market. It’s more a product of the fact that the markets were grossly over-valued a couple of years ago and we are now approaching something like fair value. History suggests it may be some time before confidence in the markets resumes, but you can never predict that. For the moment, the markets must be treated as a high-risk investment.

Vicki Bolton, spokesperson, National Association of Pension Funds
Although pension funds have lost a lot of money as the stockmarket has fallen, most big funds would hold shares for a long period of time and won’t shelve them. So falling markets will not be a problem for big pension schemes. But we also think that the problem small schemes are facing is a very short-term one.

Pensions are a long-term investment. We are looking at a problem over the last six months and pensions run over decades.

Warren Buffett, chairman and CEO, Berkshire Hathaway
There is a crisis of confidence today about corporate earnings reports and the credibility of chief executives. And it’s justified.

For many years, I’ve had little confidence in the earnings numbers reported by most corporations. I’m not talking about Enron or WorldCom – examples of outright crookedness. Rather, I am referring to the legal, but improper, accounting methods used by chief executives to inflate reported earnings …

To clean up on these fronts CEOs don’t need “independent” directors, oversight committees or auditors absolutely free of conflicts of interest. They simply need to do what’s right …

Recently, a few CEOs have stepped forward to adopt honest accounting. But most continue to spend their shareholders’ money, directly or through trade associations, to lobby against real reform. They talk principle, but, for most, their motive is pocketbook.

For their shareholders’ interest, and for the country’s, CEOs should tell their accounting departments today to quit recording illusory pension-fund income and start recording all compensation costs. They don’t need studies or new rules to do that. They just need to act.
(Article in New York Times, 24 July 2002)


The recent lows in the FTSE-100 index took the UK market back to levels not seen since 1996, effectively wiping out all capital gains since then.

Since the peak of the market at the end of 1999, the main market index has lost more than 45% of its value. While the market has bounced 15% off the recent lows, it is still more than 2,500 points off its best.

Wall Street zoomed up more than 80% from the beginning of 1997 to its peak in early 2000, outstripping London’s 68% rise over the same period.

Oddly, the Dow Jones Industrial index has only fallen 35% off its peak, and still stands 36% higher than at the beginning of 1997. This year’s slump only takes the market back to where it was in autumn 1998. The recent 13% bounce is almost the same as London’s.

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