The dreaded D-word


Charles Stanley

170p -7.5p

WHATEVER the generic name for pundits might be – a preen of pontificators? – there is a growing coalescence of opinion-makers predicting deflation next year.

That was the case even before consumer price inflation came in yesterday at 4.5 per cent for October – down from 5.2 per cent in September and a much larger fall than expected.

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If it is true that deflation is on the way that is very bad news. Falling inflation is welcome, as it gives the Bank of England's monetary policy committee room to cut interest rates further to fight the recession. It stiffens consumers' sinews.

But if we go into negative inflation, that is harmful because it puts people off buying things, thereby stalling any economic recovery, because they hope they will get goods cheaper if they hold tight.

Deflation is one of the main reasons the Japanese economy spent the 1990s virtually stagnant following the bursting of its property and stock market bubble at the start of that decade.

Britain could certainly do without the other D-word as much as it wants to avoid a Depression.

Looking how far consumer price inflation still has to fall, deflation is not likely to be a problem until at least next summer, and more probably the final quarter of 2009.

But even its spectre is worrying as it would undoubtedly prolong Britain's economic pain and delay recovery.

As oil prices continue to move downwards, we can expect further sharp falls in inflation over the next several months.

The danger of this downward trend culminating in deflation, and further aggravating the recession, makes it even more likely that the Bank of England will cut interest rates by up to another full percentage point in December.

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EARLIER this month City firm Teathers' private stockbroking operation was bought out of administration by private client stockbroker Redmayne-Bentley.

Another well-known independent firm, Charles Stanley, which put out interim results yesterday, has also been hitting the acquisition trail.

In the six months to the end of September, Charles Stanley swooped for Truro Stockbrokers and for the UK private clients business of Insinger de Beaufort. And since the period's end, the group has acquired Griffiths & Armour (Financial Services).

Clearly, smaller broking and advisory firms have decided that one way out of the extraordinary conditions they are seeing in financial markets is to acquire in order to a) drive up business volumes to take up the slack, and b) de-duplicate back office functions wherever possible to save costs.

As this column has said before, we are virtually certain to see more of this as a response to the difficult conditions.

In the period under review, Charles Stanley's revenues fell by 7 per cent to 49 million, while profit at the securities arm fell more than 3m to 5m.

Private client revenue was pretty steady, but total funds under management at the group slid 8 per cent to 10 billion.

Charles Stanley is keeping the interim divi at 2.1p, however, and says it is "seeing signs of steadier conditions and a narrowing of margins in the wholesale lending markets".

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Not for the first time (Brewin Dolphin comes to mind), the smaller broking and investment companies are showing the bigger boys how to maintain ballast and nerve in a storm.

SOME sound advice comes from the City's Securities & Investment Institute on bonuses and remuneration. The body, which promotes integrity in the City as well as being its leading examinations body, says it has nothing against bonuses per se.

But the SII also says, quite refreshingly, that achievements leading to bonuses should not just be limited to extra income accruing to the firm involved.

An individual may be worth a bonus because he or she saves a company money, not just earns them more. Or as the body puts it succinctly: "A pound saved is as good as a pound earned."

The SII says that payment of bonuses based solely on an employee's individual "profit" needs exceptional justification "because of the possible incentive that it gives to an individual to put their interests before that of other stakeholders".

If such horse sense had been heeded by the banking industry, we all might have been spared the recession and jobs carnage that is now grotesquely bestriding the whole economy.

Air China seeks government help


THE state-run parent of Air China, the country's flag carrier, is seeking a cash injection from the government, an industry source has claimed.

"China National Aviation Corp (CNAC] is actively communicating with the government about a cash injection," the source said, but gave no details.

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CNAC declined to comment and Air China executives could not be reached immediately.

The state-run parent companies of China Eastern Airlines and China Southern Airlines, the other two of China's three largest air carriers, are likely to get government injections of three billion yuan (290 million) each to cope with high costs and weak demand, the official Shanghai Securities News has reported.

Simon Moss of SWIP


Activision Blizzard

$10.41 -$0.06

Scotsman says BUY

THE economic downturn has undoubtedly battered the retail sector worldwide. However, while on a daily basis we face many reports of struggling balance sheets, there are lower key winners beginning to emerge.

While October was an exceptionally tough month for retail, the US video game industry remained uniquely strong with sales rising 35 per cent. With more people likely to stay at home in the current economy, video games are viewed as good value for the hours of entertainment they bestow.

This industry shows signs of further growth ahead, driven by the value proposition of gaming and hardware price cuts that form a natural hedge against falling consumer spending.

With more than $3 billion of cash on the balance sheet, no debt and a clear scope for international growth, Activision Blizzard is a clear leader in independent video game software. Boasting an increasingly strong product line-up, the companies newest offerings, such as "Guitar Hero World Tour" and "Call of Duty: World at War" are receiving good reviews and sales.

"World of Warcraft", one of Activision Blizzards most triumphant inventions, makes more money than a Hollywood blockbuster every month and controls two-thirds of the online gaming market. The recent launch of the updated version, "Wrath of the Lich King", saw thousands queuing through the night.

With this strong reaction to what are becoming legendary games, combined with the most prominent holiday season impending, we see this as not only strong evidence of the stock's resilience, but also a sign of potential growth.

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• Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions. Past performance is not a guide to the future.

BPI sure it can perform in line with expectations


BRITISH Polythene said that its full-year results are likely to be broadly in line with management expectations, despite the difficult market conditions.

Demand from the UK construction sector and associated industries, which traditionally accounts for around 15 per cent of group turnover, is currently down nearly a third.

"We realise that the current drop in demand from this sector is likely to continue for some time," it said, adding that other markets though, particularly those related to agriculture and food retail, continue to show modest volume gains.

Overall, total group volumes for the nine months to 30 September 2008 are in line with last year, but were more then 5 per cent behind in the third quarter compared to 2007. The group said raw material input costs will be more than 1 million higher than last year for the month of November alone and it expects full year cost to be 8m higher than 2007. It sees energy costs starting to reduce into 2009.

It has already taken some steps to reduce its cost base and announced over 50 redundancies at various plants and recently extended its banking facilities.

Investors plug into nuclear group British Energy despite profits slump


BRITISH Energy confirmed a major slump in profits and production in the first half yesterday, but its shares rose on expectations that a deal with EDF will be completed.

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Traders also saw BE as a safe haven as other sectors took a knocking. Shares in the nuclear power group remain below the French company's takeover offer price. Analysts at Evolution maintain that the price substantially undervalues BE, but shareholders are poised to accept the deal. BE shares rose 8p to 758p.

If you believe Bill Coley, the chief executive of BE, one of the firm's major supplies, Glasgow-based Weir Group, will do "very well" out of EDF's plans to build new nuclear plants south of the Border. The market either does not believe him, or is more focused on short-term pressures, with Weir falling 5.1 per cent to 307p yesterday.

British Polythene Industries dropped 10p to 185p after warning of a sharp fall in demand from the construction sector and record energy prices at the start of the fourth quarter.

Interior refitter Havelock Europa was more bullish, saying revenues continued to rise despite a weakening economy. Its shares rose 2.5p to 36.5p.

Crude oil prices rose, boosting the larger producers. Dana Petroleum was lifted 19p to 795.5p, while Venture Production climbed 11.25p.

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