Caution expected as a nervous market waits for takeover action

STOCK MARKET WEEK

As takeover action goes it does not come much heavier than BT and Cable & Wireless; if talks are successful it could create a pounds 35bn deal, far bigger than anything the stock market has experienced.

It could, therefore, be argued the market has got the deal it so desperately wanted and shares should move ahead.

But there is not much chance of dramatic progress this week. The long Easter holiday will prompt a cautious approach and the end of the financial year, whilst possibly encouraging a deluge of tax effective bed-and-breakfast deals, will merely produce a little window dressing activity.

The BT/Cable talks face a multitude of hurdles and are given no more than a 75 per cent chance of succeeding.

But two big deals hover. This week, or next, the Monopolies and Mergers Commission should produce its conclusions on the National Power and PowerGen bids for distributors Southern Electric and Midlands Electricity.

It is widely expected that the proposed deals will be cleared. If, however, the bids are blocked the two cash-rich generators are expected to embark on share buy-back programmes and pay special dividends. Salomon Brothers, the US investment house, has said NP and PG shares are at least 30 per cent undervalued.

Last week the market put on a pretty uninspiring display, despite growing rumours of extensive corporate action. The failure of the "good to talk" negotiations to set shares alight stems from the growing political nature of the market.

A stampede to get corporate action completed before there is any danger of a Labour government meddling in bids and deals is the favourite scenario. However, as the year drags on thoughts - and fears - of the Labour approach if it does win power are bound to colour sentiment.

Another indication of the more nervous nature of the market is its willingness to be influenced by bad news and pay little attention to more cheerful omens.

For example, a New York slump will hit shares but an upsurge is likely to leave little impression. US payroll figures, due next week, recently caused alarm and despondency. Still, as they will not be published until Good Friday, any impact this time will be postponed until after Easter.

Goldman Sachs, the US investment house, cites political influences as one of the reasons for its bearish stance. It thinks the market has peaked and reduced its Footsie forecast for end June to 3,600 points.

It says: "We believe the equity market is now entering a classic bear market phase - where prices fall over time, even though the market is up more days than it is down - and we would strongly reiterate our advice to adopt an underweight and defensive position."

Increasing gilt yields and uncertain company profits also worry Goldman, which adds: "Political risk is likely to be increasingly priced into the market as funds go underweight in the UK, preferring foreign equity markets."

Goldman's longer term Footsie forecast - covering 12-18 months - is 3,400.

But it takes many views to make a market and Societe Generale Strauss Turnbull is much more positive. Its Footsie forecast is 4,150 to 4,250 for June and it is shooting for 4,000-plus at the end of the year.

Since peaking at 3,781.3 in February, Footsie has moved narrowly. The supporting index, covering the 250 shares outside the blue-chip club, has, however, picked up a strong head of steam. They closed at another record high on Friday.

If there are any shocks next week the market should be able to tap into a drop of the hard stuff to steady its nerves. On Monday, Macallan Glenlivet, the famous malt whisky producer, reports, followed by The Highland Distilleries Co on Tuesday.

Although the world whisky market remains weak, the Scotch double should manage progress. NatWest Securities, the investment house with a strong north-of-the-Border influence, sees MacGlen producing a year's figure of pounds 7.58m against pounds 6.69m and Highland, the Famous Grouse group, making interim profits of pounds 24.8m, up from pounds 23.7m. The two whisky houses have close links with Remy Cointreau, the French brandy and champagne group.

Big guns reporting this week include Burmah Castrol (today) and Tarmac (tomorrow).

Excellent figures from Burmah's quoted Indian off-shoot in February have encouraged the market to look for around pounds 250m, up from pounds 219.5m.

Tarmac, following its assets exchange with George Wimpey, is now a pure aggregates/ construction hybrid. Williams de Broe expects profits of pounds 97m before losses on a construction contract. Last year the group achieved profits of pounds 107.2m.

Alfred McAlpine is another builder featuring in this week's diary. It reports on Thursday when a little changed pounds 10.5m is the expectation.

Friendly Hotels is scheduled for Thursday. The industry's trading climate has improved quite significantly, with even the struggling Queens Moat Houses making a much better showing than many expected last week.

The group should have shared in the revival and Greig Middleton is forecasting pounds 4.34m, up from pounds 3.65m.

Friendly is the third quoted creation by veteran hotelier Henry Edwards, who has 8.65 per cent of the shares.