/www.fxserver.com/ SCRUTINEER
FRESH slides in stock markets and renewed weakness in the dollar have been put down to war nerves. I am not so sure. My sense is that these latest falls are also due to a growing awareness of systemic problems in the world’s leading economies and that a military resolution in Iraq - however swift and successful - will only provide a short term fillip.
There are huge imbalances in the US economy and growing evidence of slowdown, while Europe and Japan, which might have acted as counterweights, are also slowing.
The further weakening of the dollar to a new four-year low against the euro on Friday was a reaction, not just to the growing diplomatic shambles at the UN but to the latest weak US unemployment figures. The 308,000 drop in non-farm payrolls was widely spread: job losses included 48,000 in construction, 53,000 in construction, 92,000 in retail and 86,000 in services. "Special factors" cannot be cited as an excuse.
These figures, together with other data pointing to slowdown, help to account for the sense of a growing momentum to the dollar’s slide. It has now lost 14 per cent on a trade-weighted basis and 25 per cent against the euro since a peak a year ago.
It is not just "Iraq", but the recognition of the US’s huge imbalances - a trade deficit that could reach $550 billion this year while the budget deficit heads to $400 billion - that accounts for the sense that the dollar could be embarking on a steep slide. So far it has been tame by recent historical standards: between 1985 and 1990, the dollar fell by 40 per cent on a trade-weighted basis, and by a half against the currencies now comprising the euro. Its current level of $1.1067 is already provoking shrieks of pain from the continent. But some predict it could rise to $1.20 by the year-end. Eurozone economic forecasts are being further slashed.
Time was, of course, when France and Germany could appeal at G7 summits for policy co-ordination to cushion the dollar’s slide. But even if such things could be officially ordained, such pleas are now hardly likely to elicit much sympathy in Washington.
Higgs: too much, too late
WHAT started off as an isolated protest against the incoming tide of the Derek Higgs code for non-executive directors is turning into a full blooded revolt.
Research by governance monitoring agencies reveals that every company in the FTSE100 fails the new Higgs code of corporate governance. This week the CBI will press for substantial modification of the code, due to come into effect from July. Even the Financial Services Authority, which will have ultimate responsibility for policing the code, fears that it will put companies in such a tight governance strait jacket most will be in breach of it.
Companies have every right to be concerned. Arguably the most troubling requirement is for boards to appoint a director to communicate the views of shareholders to the board. What, one wonders, is supposed to the role of the chairman?
It gives no comfort to shareholders: indeed, their concerns would be booted down the boardroom table if they are no longer to reside, fully and centrally, with the chairman.
For many companies, the Higgs code could not have come at a worse time. They are facing the toughest trading conditions for a decade. Their desperate need is to knock costs out of the business - not to add more. Higgs will not make a single dividend safer.
And for shareholders - and former shareholders - this is an all-too-late bolting of stable doors. Higgs will not restore the public trust in companies that was shattered, first by the widespread incidences of corporate greed in the 1990s, and then by the sharpest and most prolonged period of falling equity markets for a quarter of a century. Deep and widespread damage has been done to the reputation of equity investment. Sadly, there still seems all too little recognition of this damage and its implications for the market.
Pension potholes
Speaking of which, the huge black holes that have opened up in company pension schemes have added a further reason for investors to be sceptical of corporate accounts and profit projections.
The good news, says Michael Saunders, economist at Schroder Salomon Smith Barney, is that the aggregate pension deficit for UK companies does not seem big enough to derail the economy. Indeed, he describes it as modest compared with the geo-political uncertainties and the scale of monetary and fiscal stimulus now underway.
Company pension contributions fell from 15.6 per cent of profits in 1981 to just 3.7 per cent in 1998, the bulk of this fall going on employer contribution refunds or holidays to artificially boost profits. Now companies’ contributions are back up to 6.3 per cent of profits. But the stock market slide is deepening the pensions holes faster than companies can fill them. Watson Wyatt recently estimated the UK pension aggregate black hole at ?65 billion at end December (or ?130 billion if FRS17 applies).
Even greater increases in company pension contributions will be needed - extending to an extra ?4-?5 billion a year. Now you see why next month’s hike in national insurance (jointly costing employers and employees ?7-?8 billion) is about as welcome as a hole in the head.