Now that the long-gathering recession is well and truly upon us, investors in Britain’s larger quoted companies are beginning to look forward to an eventual upturn. Its timing is uncertain and things undoubtedly may get worse on the economic front before they get better, with inflation on the horizon even while deflation still looms, but bulls detect grounds for optimism over the medium term.

So far, at least, markets have reacted with robust equanimity to caution from the Bank of England, gloom from Britain’s largest property company and dire forecasts for unemployment and economic contraction from the National Institute of Economic and Social Research. The FTSE 100 share index has gained more than seven per cent since Chancellor Darling’s Budget, even though it left financial circles distinctly unimpressed.

Signs of life
Investors have been absorbing the expected series of recession-linked corporate and economic setbacks without undue dismay. Many have preferred to take heart from signs of life in the banking sector, as yet undaunted by Bank of England governor Mervyn King’s warning that ‘the risks are weighted towards a relatively slow and protracted recovery’.

Buyers chose not to ‘sell in May and go away’ this year and institutions have been stumping up the billions sought in balance sheet-restoring rights issues, if not cheerfully then at least without too many howls. Recently hovering near the 4350 level, the Footsie is 23 per cent above its 52-week low, though still 33 per cent off its 52-week high, and reflects the feeling – or rather the hope – that most of the really bad news is in the market.

Clearly a minimum lending rate at 0.5 per cent and likely to stay there for some time means that companies, mortgage borrowers and others are not under the pressure they were in previous recessions. If the National Institute is right and the UK economy shrinks by 4.3 per cent this year, with unemployment reaching 3.1 million (9.6 per cent of the labour force) by 2011, that could provide scope for further restimulating economic and financial policies.

Property on the rise?
The stumbling blocks, of course, could be constraints on public finances, as tax and other revenues fall, putting pressure on social and other spending, and the potential return of inflation as a consequence of  ‘quantitative easing’ (printing money), adopted to unblock the economy. Governor King seems less convinced than many others that the banks will drop their new-found lending caution, though short memories have been a notable feature of banking parlours for many years.

Whatever his well-informed doubts, even shares in Land Securities, which warned that property recovery talk was premature after losing £4.8 billion, and reporting a £4.7 billion fall in asset value, rallied after sliding initially. At 476p, they remain nearly 40 per cent above their March low, though still 77 per cent below 2007’s peak.

Plans by property star Nick Leslau to call the bottom of that market by floating his Max Property group on AIM for £150 million with US backing have helped encourage the bulls. Of course, he may take a longer-term view than they do.

By contrast, housebuilder Barratt Developments, at 141.75p up more than threefold since last July’s low, is cautious about recovery prospects, despite sales rising four per cent year-on-year (and 20 per cent in London), warning that reluctant lenders continue to restrain the market. Shares in Taylor Wimpey, tapping investors for £510 million, have rallied nearly eightfold since November to 33.75p, but remain 93 per cent below their 2007 peak.

Financials back in favour
The banks are bouncing from their recent depths, though hapless Royal Bank of Scotland, while up fourfold since January to 39.8p, is still less than seven per cent of its level in March 2007. By contrast, Barclays, which has stayed out of state control and has rallied fivefold since January to 259p, has lost only two-thirds of its former value, while HSBC, with its additional Far East and international franchise, at 541p has kept 60 per cent of its boom-time value.

Insurer Prudential’s rally has persisted, despite a five per cent drop in first-quarter sales to £697 million. The shares have doubled since March to 429p, more than half their 2007 peak value.

On the infrastructure front, telecoms giant BT has won few friends with a first-quarter loss caused by write-downs of £1.6 billion and 15,000 more job cuts. At 90.25p, its shares are little more than a quarter of their 2007 high.

Energy network provider National Grid, at 583.5p, has received only a lukewarm response to pre-tax profits down three per cent to £1.8 billion in the year to March, a dip blamed on £587 million restructuring costs and offset by operating profits up 12 per cent to £2.9 billion and an eight per cent dividend increase. The company says it has had a ‘good start’ to the current year and has made progress in meeting its expected £2.5 billion funding requirements for 2009-10 after arranging £1.9 billion of long-term debt since January.

Sector View: Uranium
Uranium plays could well merit another look. While there has been no return to the heady days of 2005-07, when the price soared from below $20 to nearly $140 a lb, the acceleration of nuclear energy development by China and other countries is bringing back support, despite uncertainty about the destination of governments’ strategic stockpiles.

Spot prices have rallied from $44 to $51 a lb of late and market practitioners argue that long-term supply contracts, which is how most uranium is sold, are being concluded at $70 a lb. Kalahari Minerals, at 111.75p, continues to attract interest with its 38 per cent stake in Aussie-quoted Extract Resources, owner of Namibia’s Rossing South, which could hold more than 250 million lbs at impressive grades.

The company is having a stand-off with 15 per cent shareholder, mining giant Rio Tinto, whose long-standing Rossing mine is next to Rossing South. Rio has a significant stake in Extract.

Also involved is Niger Uranium, now a depressed 21p, which has both 15.5 per cent of Kalahari and a stake in South Africa’s promising Henkries uranium project. More speculative but in with a chance is Vane Minerals at a lowly 4.38p.

Vane has cash in the bank and is using cash flow from its Diablito gold and silver mine in Mexico to fund high-grade uranium projects in Arizona and Utah. Recent data has been encouraging.

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