If you lop off the bubble years of the past decade we are just about on course for a steady rise in the market
Look at a graph of the FTSE 100 index over the last 10 years and you can see that if you lop off the bubble years of the late 1990s, we are just about back on course for a steady rise in the market. The index of leading shares slid again over the last week to near the key support level of 3,650, but bounced back quite strongly. Investors are still cautious, but considering the world economic and political outlook, they are not that pessimistic.
US brinkmanship over war with Iraq continues, but there are signs that everyone does indeed want to avoid conflict, and financial markets have almost discounted the uncertainty. Press reports are unremittingly gloomy, always a good counter-indicator, and the stream of news about corporate governance and accounting failures appears to be slowing. Will we look back at this point in five years time, and mark it as the calm before the storm, or the turning point for the long, slow haul back to growth?
One thing that has certainly changed in the last two years is the culture within the investment banking industry. The challenging economic environment is hard enough, but every regulator on the planet has now woken from a 10-year slumber to roar disapproval at lax practices. In the words of Warren Buffett, who is as great a wordsmith as he is an investor: 'It's only in the rinse cycle that you find out how dirty the laundry has been. We're in the rinse cycle now.'
From top to bottom, the industry is being wrung out. With revenues running at around half the annual 15% expected during the last decade, the future of some of the weaker firms is already in doubt. Investment banking has been slower than other industries to react to economic downturn and falling profits, but now the talk is all about downsizing, consolidation or mergers. And M&A this time round is not to conquer the world, but to survive and hang on to market share.
First-mover advantage in this chilly climate means grabbing the most acceptable partner on offer before you land up on the shelf. Royal & SunAlliance and Friends Ivory & Sime have snuggled together, but Threadneedle has been up for sale for a while with few suitors. Significantly, rakish private equity houses are now circling the fund management industry in both the US and the UK.
The view from in-house is not much better. Hundreds of jobs have already been lost, and from the biggest players: Merrill Lynch, Citigroup, Schroders, Goldman Sachs and Morgan Stanley. Pay accounts for some 60% of the cost base of investment management houses in the UK and there is unprecedented pressure on all aspects of pay packages. Overly-demanding stars might soon find they are 'over qualified' for the jobs they want. In the US, shareholder activism is the growth sector of the industry. Here, recently dismissed or redundant analysts and executives willing to cry 'mea culpa' and beat their Gucci suits in public may find a role. Everything is under scrutiny: corporate proxy votes, stock option plans, poison pills, golden hellos and goodbyes, commission structures and independent directorships.
A spate of consolidation and a round of reform is not a bad thing if it helps lay the foundations for the next bull run, whenever it occurs. For the moment, markets are braced for the final spin of the economic cycle. The industry can then proudly wear clean linen for a while ' before another inevitable load of dirty washing.
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