Investors have taken heart from better-than-feared corporate news from
some of the banks and other sectors, though it has become even clearer than before how delicate an operation steering economic and financial recovery will prove to be.

Stimulated by the success of HSBC’s £12.5 billion rights issue, investors did not allow even the prospect of a near-£30 billion flood of rights issues this year across the corporate sector to stop them pushing the FTSE Index through the 4000 level in mid-April.

At times back down below that level, the index remains nearly 40 per cent below its
52-week high and less than 12 per cent above its low and no one can say we are out of the woods yet. Concern over parlous public finances may replace private sector financial woes as a market headache and yet more corporate shocks can’t be ruled out.

Bargain hunting
But the quest for bargains is showing signs of gaining ground. Companies are winning points for repairing their balance sheets, provided the terms offer significant potential gains should the market rally further and the companies involved seem able to make good use of the support.

Shares in HSBC itself at 486p are 60 per cent above March’s low, though still 45 per cent below their 2006 high. Better than expected quarterly profits from US investment banking colossus Goldman Sachs, coupled with a planned £3.3 billion share sale to repay government loans, helped sentiment on this side of the Pond.

Barclays, now selling its passive funds business to private equity group CVC for £3 billion (£150 million of it to 200 staff), has rallied fourfold to 205.75p since January. Even RBS, with US shareholders making menacing noises and yet more job cuts announced, is three times its January level at 31.4p, though little more than five per cent of its peak nearly two years ago.

Rallying from a low base
The prospect of a hefty fund raising from DSG International, parent of electronics retailer Currys, has done nothing to dampen its already depressed shares, which collapsed from 222p in 2007 to 9.49p last December and have now bounced to 33.5p. In the hard-hit house building sector, bombed-out Taylor Wimpey has followed annual pre-tax losses of
£2 billion and £1.6 billion of debts with a last-minute refinancing agreement with creditors, likely to involve a £350 million capital raising and £150 million cut in
debt facilities.

Taylor Wimpey shares, which stood at 518.5p at their peak, have rallied more
than tenfold since November, but only to 50.25p. Meanwhile, Barratt Developments has risen to 160.5p, four times its low last July but a mere fraction of its £12.89 peak in early 2007.

An unexpected fall in US retail sales for March reminded markets on both sides of the Atlantic that economic recovery is some way off. In London, shares in Marks & Spencer took a knock to 314.75p, though still 50 per cent up on November’s low, on news the company had lost market share in the key clothing sector during February, with rivals Next and Debenhams holding theirs.

A mixed bag
In property, British Land has risen 55 per cent since March to 467.5p, though a far cry from the £14.27 reached at the end of 2006, as the company negotiates with Australian-backed fund manager MGPA about selling half its £2.5 billion Broadgate office complex in the City of London. The defaulting on a £257 million asset-backed loan by property entrepreneur Robert Tchenguiz’s Globe Pub Company has hardly helped sentiment.

In the ‘defensive’ defence sector, BAE Systems is lacklustre at 326.5p, not helped
by talk of US defence spending cuts. Cobham, which recently bought US-based information assurance company Argotek for up to £24.4 million, trades at 180p, down from last September’s 236p.

These corporate gains and setbacks are unfolding before the gaze of policy makers pulled in contrary directions by the different economic forces now at work. On the one hand, the G20 summit appeared to presage yet more trillions thrown at unblocking the system – despite differences of emphasis between continental Europeans and Anglo Saxons – and the Bank of England is setting about its £75 billion ‘quantitative easing’ (or money printing) programme with a will.

Return to austerity
On the other hand, however, the British and other governments have come under pressure to repair the holes torn into public finances by the impact of the recession on tax receipts and the lavish spending on corporate bail-outs and measures to re-stimulate shrinking economies. National borrowing has already breached 40 per cent of national income and no one any more expects it to come within sight of peaking at 57.4 per cent of national income by the 2013-14 financial year, as envisaged in the chancellor’s pre-Budget forecast.

These developments have militated in favour of a distinctly more austere approach than would otherwise make sense amid still-mounting evidence of a developing recession. The National Institute for Economic and Social Research estimates the UK economy declined another 1.5 per cent in the first quarter of this year and other respected forecasters see a further contraction of between 3.5 and four per cent in 2009, with unemployment set to top three million next year.

There are clearly plenty of bargains out there among companies able to withstand the blizzard and enhance their finances. Timing remains uncertain, but, apart from special situations, a selective, value-driven approach should pay off – eventually.

Sector view: Environmental plays
Many shares with an environmental tag have had a tough time of late, on persistent losses and fears the recession will change priorities. But, while remaining speculative, some are making progress.

TEG Group, which converts organic wastes into fertiliser, has clinched a key role in the Greater Manchester Waste Disposal programme. This is worth £38 million over three years to TEG, now a depressed 54.5p, but growing fast and moving towards profitability.

Also heading into the black is degradable plastics and waste-to-energy group Symphony Environmental Technologies, which has slashed annual losses from £1.95 million to £400,000. This follows switching from offering finished biodegradable products to ‘enhancing the supply chains’ for end-users, such as supermarkets, Starbucks and Perrier. Analysts see pre-tax profits of £500,000 this year, rising to £1.4 million in 2010.
Symphony shares now languish at 3p, but could perk up if profits come.

Emissions exchange operator Climate Exchange reports strong March volume growth and says US legislative moves are encouraging. The company, which increased pre-tax profits from £849,000 to £2.75 million last year, says it traded 539,002 contracts in Certified Emission Reductions (CERs) and European Union Allowances (EUAs) on the European Climate Exchange last month, the equivalent of half the volume traded in 2007.

Chairman Richard Sandor draws encouragement from the draft American Clean Energy and Security Act, which would cut US greenhouse gas emissions to 80 per cent of their 2005 level by 2020. After soaring to £21.17 last year and then retreating to £4, the shares have rallied to 707p and could go further.

Robert Tyerman is news editor of Growth Company Investor, the UK’s leading magazine
for AIM and small-cap analysis