Robert Tyerman, news editor of Growth Company Investor, the UK’s leading magazine for AIM and small-cap analysis, observes that, whilst the pound enjoys some respite, the stock market is still under considerable pressure.

What is good for sterling can be unsettling for shares. Signals from the Bank of England that its ‘quantitative easing’ (a.k.a money-printing) programme would be suspended – rather than expanded by another £25 billion as bulls had hoped – have provided a fillip to the pound, but caused anxiety to the stock market.

After putting in significant progress earlier in the year, on hopes of an eventual economic recovery and a return to near-normal banking, the FTSE 100 share index touched a ten-week low at one point. The Old Lady’s intimations have seen sterling bounce against the US dollar, Japanese yen and other currencies and gilt yields surge, but businesses, would-be homebuyers and job seekers alike have to digest the gloomy implications for exports and the availability of finance.

Taking the long road
Even at its 12-month peak of 5,649.10, the Footsie was almost 20 per cent below its all-time high, reached ten years ago, of 6,930. Its recent level of 4,131.66 represents a 40 per cent fall over the past decade.

This can be taken as proof of all the unrecognised ‘value’ lurking in the stock market, and it certainly supports the view that corporate financiers are sharpening their swords for the next round of consolidating bids and deals, once the banks are ready to play ball. But such a record hardly helps the case for equities overall as the place to protect and grow your capital.

It does, however, suggest that a sustained recovery is on the cards, albeit at no sensational pace, once the market is convinced the authorities have achieved the right balance between nurturing commercial recovery, funding the government’s prodigious incurred debt mountain and choking off any incipient inflation. When this point will arrive is uncertain, but while base rates stay at 0.5 per cent and returns elsewhere are paltry, equities must come in for serious attention.

Hopes that oil’s next major move from around US$60 a barrel will be downwards offer the prospect of a further welcome easing of industrial and personal cost pressures. If, as more City soothsayers seem to believe, economic recovery will be a slow, uneven process, the right shares in the right place at the right time should provide eventual rewards.

Defensive outlook
Defence often plugs some industrial companies’ gaps in such uncertain times. Work on Royal Navy aircraft carriers, warship refitting and Canadian submarines, along with a ‘steady flow’ of civil nuclear contracts, have helped engineering group Babcock International, weak at 465.75p, weather a 50 per cent drop in civil construction equipment orders.

One direct beneficiary from the corporate sector’s continuing woes, AIM-quoted insolvency specialist Begbies Traynor, says new cases, including Southampton Football Club, have risen 38 per cent over the past year. However, corporate finance operations lost money, clipping the overall annual profits gain to a 26 per cent increase of £7.2 million, and the shares have more than halved in a year to 94.75p.

With retail customers counting the pennies these days, Associated British Foods, reporting a four-month sales increase of 21 per cent, has benefited from owning discount clothing chain Primark, which has doubled store numbers over the past decade and lifted operating profits from £43 million to £233 million. A Spanish sugar acquisition has also helped ABF, though the company says there have been slowdowns elsewhere in its business. ABF warns that earnings are unlikely to grow much this year, which is still better than many companies can claim. At 778.5p, the shares still look relatively defensive.

Little interest in financials
Among the banks, government-backed Lloyds, still licking its wounds from the £11 billion losses incurred by its ill-fated HBOS acquisition and the process of replacing Sir Victor Blank as chairman, has more than doubled from its 12-month low to 63.3p, though still three-quarters off its year’s high. Barclays, free from state support, has rallied more strongly at 288p, while HSBC, similarly untainted by bailout, has been relatively resilient at 496p and RBS, the most spectacular rescue case of them all, at 36.20p is little more than one seventh of its 12-month high.

With interest rates so low – even if many borrowers find that it is not quite as simple as that – equities are being looked at for yield as much as for growth, provided companies can maintain their payouts. That is why insurer Aviva, parent of Norwich Union, caused a frisson in the market when analysts suggested the company might have to cut its dividend.

At the time, Aviva said any decision must await all the relevant numbers coming in. The shares, which have fluctuated between 611.5p and 823p over the past 12 months, reached 778.5p.

Among the miners, Anglo American, the South Africa-originating colossus subject to an as yet unwelcome merger approach from Swiss-based giant Xstrata, has appointed Sir John Parker, chairman of National Grid but also well connected in the Republic, to succeed Sir Mark Moody-Stuart in the chair. Immediate political reactions from South Africa were hostile, but Anglo shares, which have swung between 914p and £29.73 over the past year, initially firmed to £16.63.

Sector view: Housebuilders
Housebuilding shares have rallied significantly from recent lows, though remaining well below historic highs, as the battered sector puts its worst woes behind it and companies take action to conserve their finances. The biggest remaining stumbling block is the lack of mortgage finance.

Bovis Homes speaks of ‘signs of stabilisation’ in the housing market, having slashed overheads 45 per cent and strengthened its balance sheet to invest in residential land at ‘attractive values’. Persimmon says forward sales are up from £458 million in January to £700 million.

Barratt Developments reports ‘higher sales rates, lower cancellations and prices levelling’. Redrow, which has also been reducing debt, says housing market demand ‘appears to have stabilised’.

However, Redrow also warns that ‘the most significant concern to the industry remains the chronic shortage of mortgage supply’. Bovis says the ‘lack of mortgage finance’ has been ‘challenging’.

Barratt chief Mark Clare is clear: ‘We are not going to see a sustained improvement in trading conditions until the availability of mortgage finance recovers’.

Some want the government to influence banks where it now has big shareholdings to unblock the mortgage market. Others hope the potential entry of the likes of Tesco and Virgin into mortgage lending could goad traditional lenders to return. How long this will take remains uncertain. For a medium-term punt, Barratt at 151p or Bovis at 396p could be worth considering.