Market uncertainty as fresh bad news expected

Looking at the heart-stopping FTSE100 chart for 2011, it is hard to avoid the conclusion that if this was a hospital patient you would check for a pulse.

Share prices fell off a cliff in July and August. We have since suffered severe volatility: rallies followed by relapses, with the market overall still well below its pre-heart attack level.

There is nothing in this jagged progression of recent months, like the silhouette of broken glass on a wall, that suggests anything by way of sustained recovery. In psychological terms it looks like a nervous breakdown.

Despite last week’s recovery back above 5,500, the index is still down 6 per cent on a year ago. Optimists contend that at least the 4,800-5000 level indicates a bottom range below which the market appears reluctant to go. There is, they say, resistance at these lower levels. But I wouldn’t count on this holding out in the period ahead.

There is one perspective that gives hope. By the end of 2012, markets should be in a better psychological state. Investors will be looking to 2013 and beyond with some confidence of a recovery of sorts.

In the UK, inflation will be substantially lower than now. And a combination of rock-bottom interest rates and further quantitative easing should help business and consumer confidence to rebuild.

In America, recovery signs will be stronger and the world’s largest economy will see a continuing recovery in household and business confidence, even if still weaker than previous cyclical upturns. And in China, policy easing will be more evident. Overall, the psychological mood of investors should be less depressed.

It is the period immediately ahead that gives cause for apprehension. Of the immediate causes for concern, the biggest, towering above the others, is the still unresolved eurozone sovereign debt crisis. Despite the so-called EU summit “accord”, Italian sovereign bond yields are back at 7.0 per cent. Portuguese yields are at 13.14 per cent, and Greece a basket case at 34.37 per cent.

Eurozone politicians cling desperately to the belief that Germany will relent and the European Central Bank will resort to the money printing presses. I suspect that, if it ever does, it will only be after a horrific financial crisis has threatened to bring down the entire eurozone banking system. Meanwhile, markets await a further series of ratings agency downgrades in the coming weeks. Investors should continue to batten down the hatches.

There are only so many supermarket opportunities

From slow bleed to bloodbath: such is the dire prediction for a deeply troubled retail sector. Barratts, Blacks Leisure, Thomas Cook, Mothercare, HMV and now UK lingerie retailer La Senza may prove early casualties in a greater slaughter.

Richard Fleming, head of restructuring at accountants KPMG, has warned that he expects “a raft of administrations in the next four months”. And his raft is wide: “anything consumer-facing, be that travel companies, gyms, hotels, restaurants, automotive component suppliers or food producers”. Many businesses that have struggled through in the hope that late 2011 would see a recovery now find that rescue is still far on the horizon and they now lack the means or will to hang on.

In this grim outlook, investor consensus till now has been that quoted giant supermarket groups offer a defensive haven in the storm. But might 2012 prove a moment of truth for them, too?

The broker Evolution Securities has highlighted a worrying paradox: a continuing surge in store openings coincident with a fall in consumer spending. It notes the latest CB Richard Ellis data showing total food store planning applications stand at 44 million sq ft, a rise of more than 9 per cent in the last year and equivalent to having another Tesco on the market – with room to spare. Space under construction or with consent has risen 16 per cent. This implies a remarkable 10m sq ft of consents have been granted in the past year, the bulk of this for out-of-town stores. Just how many more supermarkets can the UK take before this bubble also bursts?

Planning applications can, of course, be sat on for a time before work is started. But, even so, the assumption behind this latest surge is that supermarket retailers are set to gain a large volume of business in non-food retail, further squeezing vulnerable high street outlets. It does not look good.

Bank between a rock and a hard place on incentives

TOUGH times for counter staff in Lloyds TSB: not only has the bank increased the target for each cashier to promote products to customers but it has also slashed the commission on such referrals from £2 to just 60p a time. This seems harsh for staff on already modest pay – a pittance compared with investment bankers at the top who have enjoyed huge bonuses.

Some argue that after all the mis-selling scandals, no bonuses at all should be paid for product promotion: the ground should be level. But would we apply the same strictures to, say, a car salesman, or a double glazing rep?

If all incentive is taken away, we may be sowing the seeds of the next scandal – a pensions desert resulting from non-selling of any sort. And guess what? The banks once more would carry the can.