‘Quantitative easing’ sounds uncomfortably like the sort of procedure doctors are anxious to hear their more congested patients have undergone. Whether it is the right medicine for the UK economy and stock market remains to be seen.

Otherwise known more pejoratively as ‘printing money’, the £75 billion programme of asset purchasing kicked off with the Bank of England wading into the market to buy
£2 billion of government securities, a move greeted by a stampede to sell by investors.

The aim is to inject more money into the financial system, raising gilt prices and lowering yields, so as finally to make the banks, clogged up with present bad debt provisions and fears of more, unblock their lending channels once again to British business.

Initial rally
A depressed stock market rallied briskly in anticipation of the measures, with banks and ‘alternative investment’ groups like Man leading the charge, following comments from some bank share short sellers among the hedge funds that the sector was now a buy. But, despite rallying from below 3,500 to above 3,700 points, the FTSE 100 Share Index soon showed signs of possible wavering again and remains more than 40 per cent off its 52-week high.

Discounting future shocks and looking beyond them is what the market is supposed to do, but its immediate reaction is also to respond badly when they materialise, in the short term at least, before focusing on the wider picture.

The ingredients for an eventual market recovery are undoubtedly there, and shrewd investors with cash and time to wait can pick up bargains in currently friendless sectors, but no-one can tell how many more shocks still lie in wait in today’s climate of corporate setbacks, unwound deals, breached banking covenants and financial scandals.

Printing money clearly spells future inflation, as do a weak sterling and the billions being spent around the world on corporate bail-outs and economic stimulation. The Bank’s gilt buying has provoked charges of distorting yields in such a way as to intensify the private sector pensions funding crisis and so potentially impair investing institutions’ ability to respond by buying the market.

An inflationary cure
However, whatever purists say, a modest dose of inflation has rarely proved bad for the stock market (or even the economy), at least for a while, provided the authorities know when and how to damp it down in time – which usually they have not.

With government borrowing set to hit £150 billion, five times last year’s Treasury estimate, and public sector debt seen as reaching 80 per cent of national income, twice last autumn’s amended government target, some leeway is needed in the face of a feared economic contraction of three or four per cent this year, after another 1.5 per cent fall in manufacturing output in the first quarter.

The markets may have become blasé about the scale of multi-billion bail-outs for banks, but the expected rights issue flood,  £12.5 billion for HSBC, £4 billion for Xstrata, £1 billion mooted for Wolseley and many more, is testing institutional resources, though restoring balance sheets in this way is recognised as an essential part of their recovery – or survival – strategies. 

Among the banks, HSBC touched a 13-year low as its cash call prompted short selling in Hong Kong. Lloyds Banking Group, ‘stress-tested’ by the government after seeking state protection over no less than £260 billion of questionable assets, slid to 44.5p, having lost more than 90 per cent of its stock market value in two years, a decline that made short-selling New York hedge fund king John Paulson a profit of £344 million.

Barclays was showing a similar fall at 70p, as it agonised over whether it, too, should swallow its pride and join the government’s insurance scheme for bank assets.

State-controlled RBS, though twice its January nadir at 21.2p, remains 94 per cent off its 2007 peak.

Property sold short
Short sellers also played a part in sending property group British Land’s shares down to £3, little more than a fifth of their value at the end of 2006. Builder Bovis Homes, which announced a £79 million annual loss and said it had stopped building any new homes, is two-thirds down over two years at 426p.

Amid the sector gloom, one company claiming to detect signs of an upturn in the residential property market is upmarket estate agent Savills. However, since the company has also unveiled a £7.7 million annual loss, against £85 million profits previously, this note of cheer did not stop the shares sliding to 215.75p, less than a third of their 2006 high but 23 per cent above last July’s low.

In the heartland of industry, the news continues to be grim. Cookson, supplier of ceramic components to steelmakers, bemoans a global weakness in demand and falling production. The company, whose shares stood at 131p less than two years ago, now trades at just 13.5p, though it has bolstered its balance sheet with a £241 million rights issue, albeit at a lowly 10p a share.

In a mixed resources sector, surging profits, continuing discovery successes and  £1.4 billion of new debt facilities have not stopped former stock market star Tullow Oil from falling nearly 250p from its all-time high to 740p.

Sector View: Drugs and healthcare
In a recession, medicine and healthcare remain spending priorities, while there is still anything to spend. Speciality drug company Shire is paying Belgian group UCB £49 million for worldwide rights, outside the USA, Canada and Barbados, to its attention deficit hyperactivity disorder (ADHD) treatment.

The company expects the acquisition to be ‘earnings neutral’ this year and to add to profits from 2010. The fall in Shire shares, now 799.5p against a three-year  high of £15.10, looks overdone.

Meanwhile, the US Food & Drug Administration has granted initial clearance for wound-care specialist Advanced Medical Solutions’ LiquiBand topical skin adhesives. The company hopes to introduce LiquiBand this year into the key US market.

Advanced Medical increased pre-tax profits eight per cent to £1.2m in the first half of last year and has been decidedly upbeat about trading. At 32.25p, the shares have a following.

Healthcare financial software specialist Craneware should prove relatively resilient at 225p after increasing interim pre-tax profits 59 per cent to US$2.6 million (£1.8 million). The West Lothian-based company lifted turnover 22 per cent to US$10.6 million in the six months to December, with contracts booked up 68 per cent to US$21.8 million.

Chief executive officer Keith Neilson says AIM-quoted Craneware’s products enhance the financial performance and transparency of US healthcare organisations. The company is benefiting from US legislation to improve pricing transparency and stepped-up auditing of hospital reimbursement claims under the US government-funded Medicaid and Medicare programmes.

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