Fear of debt shakes shares

YOU might have thought London shares would be strong at present given the improved balance sheets and strong earnings performances.

Among Footsie companies we have seen earnings above expectations from AstraZeneca, GUS and Boots in the past 48 hours.

But stock markets have a habit of biting back when you least expect it. The recovery in share prices in 2003, when the Footsie 100 climbed 12%, has given way to drift.

On Thursday, the index sank 71 points to 4306 - the lowest point this year - wiping £17bn off share values. As always Wall Street was an influence with the Dow Jones index slipping below 10,000 at one point on concerns about tech recovery and slippage in the leading index of indicators which tracks future economic trends.

Here in Britain rising interest rates - with the markets expecting 5% or more by year-end - are a source of worry. This was fuelled by the latest numbers from the High Street showing a 1.1% gain in sales and a year- on-year increase of 7.2%, suggesting that household consumption is far from benign.

Financial markets are now factoring in a quarter-point rise in interest rates to 4.75% in early August when the Federal Reserve is expected to raise US rates too.

Higher interest rates hit corporate earnings by raising debt charges, but they also change investment preferences. Holding money in cash and bonds becomes more attractive than equities.

This comes at a time when equities are less in favour. Institutional investors and pension funds now hold a bigger proportion of fixed interest stocks than in the past, having found themselves over-exposed to the stock market in the 2000 technology bubble. The liquidation of these shares is the elephant sitting on top of the Footsie.

As we reported yesterday, the market also appears to have very little appetite for bigger flotations with the price range being cut for many offerings including M&C Saatchi, Umbro, Virgin Mobile and Premier Foods. Takeover fever also has cooled with the retreat of Philip Green from the gates of Baker Street.

But when prices fall far enough there will always be those who see a buying or takeover opportunity. There is a consensus, for instance, that shares in Abbey National and Lloyds TSB, with its big yield (and which I hold), are flashing 'come-in-and-make-me-happy' signs.

Certainly, the Footsie needs a tonic to lift the spirits if this is not to be a wasted year for equity investors.

Crestor run

CREDIT should go to AstraZeneca for publishing new data on its anti- cholesterol drug Crestor which is designed to demonstrate that it is as safe as other compounds in the same statin class.

Despite a heavy promotional budget, Crestor is not off to the flying start it might have hoped for in America, but has nevertheless grabbed a market share of 6.8% and sales of $336m.

Despite the lingering questions over Crestor, Britain's secondlargest pharmaceutical group is holding its own in an increasingly competitive drugs market.

It was able to report big uplifts for ulcer drug Nexium and schizophrenia compound Seroquel, for which it has just gained Food and Drug Administration approvals. Overall, first-half sales were up 13%.

A combination of cost controls, growth in sales of new compounds and exchange gains helped profits in the first six months, although there is an implied warning that some of this may reverse in the second half.

The shares were caught up in the negative mood of equities. For the moment, however, AstraZeneca appears to have one of the more promising pipelines in European pharmaceuticals.

Splits delay

HAS the Financial Services Authority made a mistake in the way it is going about efforts to resolve the split capital trust fiasco?

The FSA's approach has been to seek a settlement among all the providers under which they will cough up £300m in full and final settlement of the claims made by those who lost money.

But it is clear that the big players including Martin Gilbert, of Aberdeen, and Terry Smith, of Collins Stewart, are all singing from different song sheets and thus able to play the delay game.

John Tiner's habit of calling in the main parties together and threatening penalties if they do not settle has not worked. A climate of divide and rule has developed.

Tiner and the FSA might have made far more progress had they followed the example of New York State Attorney General Eliot Spitzer and targeted companies one by one rather than en masse.

The current approach shows no signs of producing the desired admission of liability and compensation.