At last the ‘phoney war’ is over. As the credit crunch works its way steadily through business, property and personal dealings, and worldwide recessionary fears further
sap confidence and paralyse decision-making, the FTSE 100 Share Index has fallen more than 20 per cent from its year’s high to test new lows below 5300 points.

New twists in the American housing slump, with the multi-billion dollar crisis at the US government-sponsored mortgage financiers ‘Fannie Mae’ and ‘Freddie Mac’ have helped bring the crisis in UK property and construction into even starker relief. The Bank of England’s Monetary Policy Committee’s decision to hold base rates at five per cent despite the recessionary build-up may have been inevitable, given the steady rise in inflation.

Little room for manoeuvre
But the measure does suggest a disquieting lack of manoeuvre or even confidence, now that the global movements seem to have overturned the rival certainties of monetarism and Keynesianism.

The belief that growth in China and India would simply offset declines in the West overlooked the fact that much of their growth depends on exports to the West and would falter if Western demand slackened off.

But corporate debt, much incurred in the heady takeover spree of recent years, still weighs heavily on the market. Bankers worrying about evaporating bonuses – and jobs – are having to address the consequences of their previous reckless greed, not only as affecting their corporate clients but also their own employers.

Meanwhile, any bargain hunters sitting on cash are certainly not yet being forced back into equities. That time will come, when gloom seems universal and unrelieved,
but perhaps not just yet, except in special situations – though selective energy and raw material plays should have life left in them.

A warning from chief executive of financially strapped Barratt Developments of 60,000 jobs at risk in the building industry is only part of a wider negative picture painted by the latest British Chambers of Commerce economic survey. This speaks of unprecedented gloom among smaller companies and says there is a ‘serious risk of recession’, with 300,000 more jobs on the line.

Barratt itself is one case where shrewd ‘bottom fishing’ may have paid off in the short term. The shares, which had plunged from £12.89 last year to 39p last month, have bounced nearly 90 per cent to a still-depressed 72p. The company, itself shedding 1,200
jobs, has negotiated a £400 million refinancing of the outstanding debt used for last year’s £2.2 billion acquisition of Wilson Bowden.

Rescue mission
Another ‘rescue’ worthy of the 1970s banking and property crisis grabbed the market’s attention when the banks were persuaded to support ailing Bradford & Bingley’s £400 million rights issue. That helped the shares rally from 34p to 47.5p, a mere 8.8 per cent of their value two years ago.

Gloom is less relieved in some other parts of the financial sector, where Michael Spencer’s ICAP inter-dealer broking group has fallen from last year’s 728p high
to 424p amid fears about the sector.

F&C Asset Management has slumped from 232p two years ago to 97p, as finance group Dawnay Day offloaded its 20 per cent stake at a hefty £80 million loss and insurer Friends Provident – at 84.75p itself, less than half last year’s 227p – continues to hawk round its own 52 per cent F&C holding.

Anyone hoping for an injection of cheer from the usually ebullient Mike Ashley, founder of sports clothing retailer Sports Direct, will be disappointed by his description of the retail environment as the worst he’s seen for 25 years. After a 50 per cent annual profits slide, Sports Direct shares have fallen from 285p last year to below 60p.

It is, of course, Marks & Spencer that has provided the most personal drama in the retail sector. Sir Stuart Rose has gone from saviour to scapegoat after the company’s latest dismaying sales figures. Dissident shareholders have thwarted his move to combine the roles of chairman and chief executive, with a fifth of the shareholding against him. At 229p, M&S shares have fallen nearly 70 per cent since last year’s high, but that is presumably not the end of the story for such a major company.

Avoiding leverage
The burden of debt weighs even more heavily in the pub trade, often as a consequence of ‘leveraged’ acquisitions. Shares in Punch Taverns, which is groaning under £4.7 billion of debt, have slumped from £14 in 2007 to less than 230p now. Shares of Regent Inns, owner of the ailing Walkabout chain, have collapsed from120p to 3.63p after a dive in profits and abortive bid talks. Photo booth operator Photo-Me International has suffered a similar fate, its shares having lost 90 per cent of their value in three years, after a
£21.6 million annual loss.

Certain key industries hold up better than most in such times, and Associated British Foods, owner of brands such as Kingsmill and Twinings, says sales rose 24 per cent in the 16 weeks to 21 June, better than the 15 per cent increase recorded for the first half of the year. However, growth slowed at its Primark retailing subsidiary, a reversal partly attributed to poor weather. But ABF shares, though not brilliant performers, have at least fared better than others in the sector. At 729p, they are more than £2 down from last year’s high, but have so far managed to stay above 2006’s 699.5p low.

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