Terry Murden: Clouds over sunshine of recovery

The past week has been a memorable one, kicking off with a twin sporting success for Britain amid long-awaited sunshine. Yesterday even produced the hottest day of the year. Clearly, the only way is up.

Are we really seeing the end of the slump and the beginning of a recovery? With everyone basking in searing heat and buoyed by victories for the British Lions and Andy Murray it would seem churlish to show the slightest pessimism.

But market traders and economists remain cautious about too much exuberance. Sure, talking about recovery is just as important in making it happen as talking down the economy has the opposite effect, but this is a time for some level-headedness.

First the positives: the Dow Jones Industrial Average and the S&P 500 hit new highs on Friday, while the Nasdaq hit a 52-week high. The Dow’s rise would have been greater had it not been for the fire on a Dreamliner aircraft which caused a 4.7 per cent fall in Boeing’s shares.

Two chunky bids were posted on Friday, a £3.3 billion offer for the British technology firm Invensys and a £3bn approach for the insurance business Phoenix. Mega-deals are not necessarily a good thing but they do point to a return of confidence.

The advisory community will take heart from any indication of an upturn in merger activity which has fallen to its lowest level since the crash. It will, inevitably, lead to more speculation and already a number of companies are in the spotlight as potential bid targets, including Scotland’s Weir Group.

A third positive is evidence of a recovery in the Scottish economy. The Bank of Scotland’s latest purchasing managers’ index showed that business activity is accelerating at its fastest rate in six years. As we report opposite, there is also hope that the beleaguered high street is achieving a new state of stability.

So what could go wrong? The biggest worries are that the Eurozone remains in the doldrums. It may not be hitting the headlines, but the problem has not gone away. China’s growth is slowing and the bull runs on various stock markets, including London, have been fuelled to a large extent by the heads of central banks in Europe, London and New York promoting loose monetary policy. Any mention of tightening encourages another bout of selling. Such nervousness does not point to any guarantee that all our problems are behind us.

Privatising the Queen’s head

THE coalition last week achieved something that no previous government has managed to pull off: putting Royal Mail up for sale.

But the biggest question asked was whether it is necessary to surrender 500 years of public ownership.

The workforce, as represented by the Communication Workers’ Union, remains opposed to any sale. But this is not a privatisation driven by 1980s-style ideology, nor is it simply about the government needing to raise money.

The business will require further investment, not least to ensure its performance matches that of its peers. It has been argued that Royal Mail should not starve other public services of capital. But bringing schools and hospitals into the debate looks like emotional blackmail and this argument has been challenged by those who say that the government can get credit at far cheaper rates than any private borrower. Even so, in private hands it would be free from political interference.

One pitfall for investors may be the legal commitment to retaining the universal service obligation which guarantees the same price for delivery between any two points in the UK. This is a dearly loved principle, but one that comes at a price.

The government has made two big strides that tilt the balance in favour of a sale. Profitability has been restored and the £12bn pensions deficit has been parcelled up, so to speak, and put on a shelf. Moya Greene, the chief executive and former head of Canada Post, has achieved the former while the taxpayer will shoulder the burden of the pensions liability.

These two moves make the business more attractive to investors, as do optimistic forecasts for parcels growth and a loosening by the regulator on its operating margin.

These factors alone point to a price being put on the Queen’s head.

Twitter: @TerryMurden1