Stock Market Week: Stress and strain savage the tiddlers

FOOTSIE'S DRAMATIC decline from the 6,179 points peak achieved only four weeks ago has tended to overshadow the blood and tears shed on the stock market's undercard.

The small cap index also reached a high this year. The happy event occurred in May. Since then it has been all downhill. Last week it was teetering uncomfortably close to its lowest level of the year, hit on the opening day.

Indeed, even when the market was attempting to throw off its cares on Friday, the small cap index spent much of the day in the red. It ended the week at 2,333.4, just 13.2 above the low point and far removed from its happy 2,792.7 peak.

Composition of the index is set each December. Last year the capitalisation cut-off point was fixed at pounds 65m. Such has been the devastation that around 60 of the current constituents have market values below the minimum with, for example, Tie Rack now worth pounds 20m.

It could be argued that the rest of the shares in the outer reaches of the market have suffered even more savagely; as measured by the fledgling share index, they have been in decline since 1994. In that year this index, which embraces nearly all the tiddlers, peaked at 1,778.3. It did hit 1,517.11 this year and is currently around 1,270.

Why is the undercard so out of favour? The hoary old explanation put forward is a lack of liquidity. Market-makers do not carry enough shares on their books, and are unwilling to trade in big blocks because they are likely to be stuck with them and bang prices at the first sign of a seller. The spreads offered between buying and selling prices are often exceedingly wide. So, runs the argument, the little 'uns are inevitably savaged in times of stress and strain.

There should, therefore, be a contrary reaction when buyers are around. To some extent there is and gains are often exaggerated. But the liquidity problem, which is not new, is not the only negative influence in this year's rout.

Such has been the impact of the strong pound that many currency-sensitive stocks, such as engineers, have for long been neglected by the market. Consequently their capitalisations have fallen and unfashionable metal- bashers and the like have been relegated down the domestic league of indices run by FTSE International.

Nowadays much of Britain's traditional industrial heartland is gathered outside Footsie.

For example Credit Suisse First Boston calculates that engineers now represent only 2.6 per cent of Footsie against 6.74 per cent of the mid cap and 6.41 per cent of the small cap. The fledgling contribution is 4.87 per cent.

In contrast high street banks, until recently the market high-flyers, make up 18.78 per cent of Footsie; 1.06 per cent of the mid cap; 2.3 per cent of the small cap and 3.05 per cent of the fledgling. Computers are probably the only area where the smaller indices score.

Friday's much needed rally by the top 350 shares - Footsie and the mid cap constituents - was largely technical and had an air of unreality about it. The end of the dog days of the August retreat - or merely a dead cat bounce?

Certainly a number of influential strategists view the summertime blues as a correction rather than the start of a bear market.

Neil Williams and Jeffrey M Weingarten at Goldman Sachs say: "We believe the current equity market correction is more likely to be a short, sharp correction similar to what we saw last October rather than the start of a bear market."

Bob Semple and David McBain at BT Alex.Brown do not expect shares to suddenly regain lost ground. With a cut in interest rates some way off and profit downgrades to be coped with, investors face a rough ride. But they say: "Investors should now start to buy the UK into the current market fragility ..."

Richard Jeffrey at Charterhouse Tilney is looking for a further 5 per cent Footsie fall.

Rentokil Initial, the environmental and security group, tops the week's results schedule with its interim performance. It should achieve chairman Sir Clive Thompson's 20 per cent growth target - a self-inflicted burden he must now regret.

BT Alex.Brown expect profits of pounds 233m against pounds 193.9m. But analysts Paul Morland and Andrew Nussey fret about the second half-year when the magic 20 per cent may prove elusive.

The company needs another major acquisition. It succeeded in wringing much better than expected returns out of its last victim, the BET cleaning group. Compass is the market's favoured Rentokil target and it is known Sir Clive has thought about a bid for the contract caterer.

Without a takeover, Rentokil's proud 20 per cent growth record is in danger. In any case any deal would probably come too late to have much impact on this year's figures and with margins under pressure it is likely Sir Clive will lose his 20 per cent tag when he presents the full year's results in March.

WPP, the advertising group once teetering on the brink of oblivion, should score a near 20 per cent interim advance to pounds 93.4m, says Merrill Lynch. Analyst David Chermont is shooting for pounds 207.4m for the year and reckons the group should hit pounds 270.1m in 2000.

THE WEEK'S DIARY

TODAY

Interims: Anglo Pacific, Card Clear, ITE, LLP, Polyhedron, Quarto, Severfield- Reeve, WPP

Finals: Future Integrated

TUESDAY

Interims: Emess, Mersey Docks & Harbour, Newsquest

Economics: Retail Price Index (July), Public Finances (July)

WEDNESDAY

Interims: JN Nichols (Vimto), Rentokil Initial, Rosebys, Weir

Finals: Armitage Bros, Game, NRP

Economics: Retail Sales (July)

THURSDAY

Interims: T Clarke, Metal Bulletin, Save

Economics: GDP (Q2), M4 Broad Money (July)

FRIDAY

Finals: Brown & Jackson