Robert Tyerman assesses the ups and downs of the stock market

U nemployment at a 14-year peak coinciding with a ten-month high in the FTSE 100 Share Index should suggest investors are now convinced the stage is set for a sustained economic and business upturn. With 2.4 million people recorded as being on the dole and the Bank of England pouring a further £50 billion of quantitative easing onto its existing inflationary bonfire of  £125 billion, bulls are saying there is now scope and leeway to set the market on a continuing upward course.

At a recent 4,731.80, a shade off the ten-month top, the Footsie has risen nearly 15 per cent in a month, but remains 30 per cent off its all-time high of ten years ago. In some respects, classic conditions exist for a prolonged advance, but unanswered questions remain, not all of them connected with possible remaining skeletons in the banking system’s cupboard, and many punters still prefer to concentrate on special situations until the picture is clearer.

With the Bank’s own economists suggesting that Britain’s recovery would be ‘slow and protracted’ rather than brisk, and disappointing retail sales figures and continuing motor industry gloom from across the Atlantic, figures showing an increase in the discount on house prices at auction have stoked fears that the UK house price rebound could be fizzling out. ‘Recovery’ shares in some of the hardest-hit sectors of the market have bounded forward, but the £84 billion of balance sheet-restoring rights issues that have tapped investors’ coffers in European markets this year have produced signs of ‘rights issue’ fatigue among the institutions and clipped the share price progress of some of the companies making cash calls.

The search for yield in a time of low interest rates, which has stoked enthusiasm for corporate bonds, has focused attention on higher-yielding equities. However, the risk always inherent in this approach became clearer with a survey by company registrar Capita suggesting that Britain’s biggest companies would pay out 13 per cent less in dividends as they seek to rebuild their finances.

The immediate cause of the stock market’s latest burst of ebullience was a clutch of bid rumours in the property sector. Shares in heavyweights British Land and Land Securities helped carry the Footsie higher on hopes that Asian consortia or sovereign wealth funds had them in their sights.

Though bears feared that share price rises might simply encourage the companies to approach shareholders for more equity cash to buy attractive and ungeared property assets, the rumours have helped move the shares. British Land shares at 511p are more than £2 up from their 12-month low, though 172p off their high, while Land Securities has almost doubled to 630p, while still only half its year’s high.

Insurance giant Prudential has pleased the City with a near 3 per cent increase in first-half operating profits to £688 million, 20 per cent ahead of analysts’ expectations. A £621 million write-down on the sale of the company’s Taiwanese business resulted in a £76 million pre-tax loss, but outgoing chief executive Mark Tucker felt able to increase the interim dividend 5 per cent to 6.29p a share.

Tucker, who hands over to Tidjane Thiam, Prudential’s current chief financial officer, at the end of this month, maintains that the company has come through the recent financial crisis ‘exceptionally well’, with average business margins up from 38 to 52 per cent, chiefly thanks to US activities.

The market agrees and Prudential shares at 514.56p are almost two and a half times their 12-month low and less than 90p off their high.

It is a rather different story at once-proud mining colossus Rio Tinto, thwarted over a desired Chinese aluminium deal and recently subject to bloodcurdling accusations from Beijing about its executives’ alleged actions over iron ore pricing. The company now plans to spin off most of US subsidiary Rio Tinto Energy America, whose coal mines feed North American power plants, through a share float to raise more than $1 billion (£600 million).

The alternative of a trade sale is still thought to be a possibility. Rio’s shares, which fell from a peak of £43.45 to 866.5p, have now returned to £23.53 and, notwithstanding recent problems, the company retains many valuable properties.

Tough conditions in the global travel market have forced Thomas Cook, Europe’s second-largest company in this sector, to abandon its target of £480 million of operating profits next year, a goal established in the happier times of 2007. The company says it fears that rising unemployment will dent its progress after an 11 per cent revenue increase to £5.8 billion in the nine months to June was accompanied by a £286 million pre-tax loss.

Chief executive Manny Fontenla-Novoa says Thomas Cook has suffered a sharp decline in bookings for winter holidays, down 27 per cent in northern Europe and 13 per cent in the UK.

‘There is no question that winter bookings are more discretionary for a lot of people,’ he comments, while pointing out that more holidaymakers are booking later than before and arguing that the company has the flexibility to cut capacity and raise prices to offset any decline in volume.

Thomas Cook’s shares, which peaked at nearly £3, now trade at 220p. That values the company at £1.9 billion.

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