Investors have little cause to cheer at Alistair Darling’s first Budget, which was followed by a fall of more than 100 points in the FTSE 100 Share Index. The Footsie is now about 1,000 points below its 52-week high of 6,754 and fund managers are bracing themselves for more rough seas ahead.

A bounce will come, but the market will have to absorb more shocks before it can look forward to a sustained uptrend. The Chancellor had scant room for manoeuvre, with inflation nudging ever higher – even by the government’s unrealistically benign preferred yardsticks – growth slowing and the public deficit swelling inexorably.

Little room for optimism
Treasury forecasts, anyway lambasted from all quarters for their persistent over-optimism, have lowered expected economic growth to between 1.75 and 2.25 per cent for this year.

A predicted increase to between 2.5 per cent and three per cent for 2010 has met weary scepticism in financial circles, as has the pious hope that public spending will grow by no more than 2.2 per cent over the next three years and then by a lower 1.9 per cent for the following two.

The markets have focused, instead, on public borrowing, which is forecast to rise this year from £36 billion to £43 billion and to come within a whisker of the government’s declared ceiling of 40 per cent of national income by 2010. The predicted borrowing is twice what the authorities lent to Northern Rock, rather than protecting depositors and letting the reckless property lender go to the wall, pour encourager les autres.

Gilt yields have soared in response to a projected 37 per cent surge in government debt issuance to £80 billion in the 2008/09 financial year, which is anything but cheering for equities. The Chancellor’s determination to proceed with his 80 per cent capital gains tax hike for entrepreneurs to 18 per cent did nothing to restore the government’s credentials as the friend of enterprise, despite a watering down of the impending new levy on ‘non-doms’.

Tax increases on alcohol, cigarettes and petrol (even though the last is deferred until October) beg one question. Does Darling want to raise more money or curb consumption? He cannot do both.

Cutting income tax to 20 per cent and simultaneously abolishing the ten per cent band won’t inspire consumers or savers, while new measures to close tax loopholes will, on past form, do little but line the pockets of accountants. As for businesses, critics claim the Budget measures will make them pay an extra £1.7 billion in tax over the next three years.

Too little, too late
The positive steps, such as raising the Enterprise Investment and Venture Capital Scheme investor limit from £400,000 to £500,000, a temporary 20 per cent increase in finance available from the Small Firms Loan Guarantee Scheme and a £12.5 million fund for businesses run by women, are all very well. But, as accountant PKF points out, they are ‘Lilliputian’ when set against the difficulties that now abound.

Wall Street and London took (temporary?) cheer when Ben Bernanke, chairman of the US Federal Reserve, enlisted the support of the Bank of England and other central banks in pumping £100 billion of liquidity into financial markets. But the method used, lending US Treasury securities against highly rated mortgage-backed bonds, shows how less-safe securities are being passed up the chain – even though the Fed stopped short of buying mortgage-backed bonds.

Crude oil has gone through US$110 (£55) a barrel, with drastic potential inflationary implications, while wheat’s strength is working its steady way through to food prices. Gold has finally reached US$1,000 an ounce.

It is worth repeating that once gloom has become universal, stock markets recover. For now, though, that point has not quite been reached, though special situations still deserve attention.

Insurance group Standard Life has rallied from last month’s low of 198p to more than 240p after a 43 per cent increase in operating profit to £881 million dispelled some of the gloom over its failed £4.7 billion bid for Resolution.

A modest increase in sales and profits has brought a quiet rally to depressed car dealer Lookers, despite a warning of tough trading conditions, and out-of-favour marketing minnow TMN has perked up on a bid approach from Tangent Group.

Product management services concern Regenersis has made up some lost ground after an interim return to profits. Previously strong Tullow Oil has slid somewhat on falling profits, despite impressive exploration successes. Kazakh mining group Kazakhmys, which has more than trebled since 2005, has faltered slightly amid informal talks about a possible £20 billion merger with Eurasian Natural Resources Corporation.

Mining giants and mega-bid targets Xstrata and Rio Tinto have failed to maintain their peaks. Phil Edmonds’s Central African Mining & Exploration Corporation has been rallying on perceived progress with projects in the Congo, although its shares’ progress has been uneven.

Restructuring stories
Speciality chemicals group Yule Catto has pleased with a 58 per cent pre-tax profits increase to £21.5 million, propelled by its strong polymers division and the benefits of internal reconstruction. All the same, at 159p, the shares have some way to go before approaching the 299p reached two years ago.

Builder Costain, which completed London’s new St Pancras International railway terminus, has so far won few friends with its first dividend payment since 1991. Stockbroker Panmure Gordon, whose shares have fallen 70 per cent since early 2006, remains out of favour after announcing profits down by £2.4 million to £3.5 million and dismissing rumours that it is seeking a buyer.

There are bargains and value out there, but their winning recognition may take time.

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