29 June - 5 July 2000

investors' corner

The Market

Leading shares closed modestly lower on Friday with Wall Street's opening recovery preventing a bigger slide. The counter-attractions of Royal Ascot ensured that volume remained light, but the mood remained one of caution ahead of the next Federal Reserve meeting and the upcoming US results season - the main reasons US stocks suffered 100-plus falls.

"Range-bound" blue-chip issues ended 22.3 points adrift at 6,391.5 points, while the FTSE 250 ended 6.3 points adrift at 6,563.2 points. The Small-Cap, however, managed a 17.4-point gain to 3.379.9 points. The Dow Jones Industrial Average was around 76 points higher as London closed. Volume was 1,400.5 million at 5.11 pm on Friday, with 92008 trades executed.

Scottish & Newcastle led the way among leading issues, closing 30 pence higher at 518 pence ahead of results which are scheduled for Tuesday 4 July, while Allied Domecq shot up 16 pence to 359 pence in belated response to news that the company is keen to snatch the Seagram drinks side if Vivendi buys Canada's Seagram. Corus ended 4-1/2 firmer at 101-1/2 ahead of Monday's interims, while Rio Tinto finished 25 pence better at 1015 pence, with brokers generally positive about the North cash bid. Unilever settled 41 pence adrift at 413 pence after the company warned that sales in 2000 should rise by two to three per cent instead of the previously expected four to five per cent.

Barclays were on sellers' shopping lists, closing 37 pence off at 1,565 pence after analysts at UBS Warburg adopted a more cautious stance on the bank. Warburg downgraded its recommendation to "hold" from "strong buy" and cut its price target to £18 from £20. The banking sector has attracted negative comment in recent weeks on concerns over e-commerce expenditure and margin pressure.

Marks & Spencer (M&S) slipped back 7 pence to 235 pence after the retailer became the first major clothing retailer to launch its summer sale - a move which prompted fears that continued poor trading has forced it to begin discounting early. The Daily Telegraph said M&S has backed its "at least 30 pct off" summer sale with a large campaign, including advertising in newspapers and on the radio. It said M&S' entire designer range, Autograph, which was launched only four months ago in 13 stores, is selling for at least 40 per cent off.

The newspaper added that, although M&S insisted the summer sale was being held only three days earlier than last year, the scale and extent of the sale has surprised the company's competitors. Analysts suggested M&S' like-for-like clothing sales are still declining. "We're hearing that in the last three weeks clothing sales are down seven-eight per cent," commented Richard Ratner analyst at Seymour Pierce. Ratner has cut his year to March 2001 pretax profit forecast to £585 million from a top-of-the-range £625 million previously. M&S last updated on current trading when it released year to 31 March 2000 results on 23 May. At the time, the retailer said like-for-like clothing sales for the first eight weeks of the new year were up 1.5 pct on last year. M&S' next update on trading is due 19 July when the group holds its AGM.

Reuters dipped 17 pence to 1,250 pence after Morgan Stanley downgraded the stock to "outperform" from "strong buy", slashing its price target to 1400 pence from 1812 pence. Morgan Stanley commented that the downgrade was on a revised sum-of-the-parts valuation. However, the broker said Instinet.com, the retail arm of Reuters' brokerage subsidiary, is likely to turn in a positive performance, despite pricing concerns.

Shares in National Grid retreated 12 pence to 529 pence after Deutsche Bank cut its recommendation on the stock to "market perform" from "buy", stating that it believes the share value is trapped in the company's Energis stake. In a note to clients, the broker said it believes the shares are worth 650 pence each - but said that Energis' current market valuation is low - which, along with a report from the regulator on regulated prices later this month, will further compound the undervaluation. Deutsche added that National Grid's recent US acquisition could point towards it being on the acquisition trail over there again, adding to the stock's uncertainty.

BAe Systems proved a positive feature throughout the session as dealers responded positively to news that the company will be a 20 per cent shareholder in the new Airbus Integrated Company. The news led SG Securities and Dresdner Kleinwort Benson to reiterate their "buy" ratings on BAe, with Dresdner looking for a long-term target of £5, according to its analyst, Nick Hislop. "We've had a buy for a long time," he said. "On today's announcement this target could go up on an 18-month basis."

BAe's stock is not expensive in comparison with others in the civil aviation and defence sectors. In addition, there is the possibility of BAe pushing for further consolidation in its own right. "Imagine they sign up with Boeing, or Lockheed Martin. You're looking at either the largest defence manufacturer in the world or the biggest defence and civil manufacturer. Either way, no-one can touch them," Hislop said.

Teather & Greenwood, however, reiterated its "reduce" on BAe - solely, as analyst Adrian Murray explained, on valuation grounds. "We have a three-year price target of 439 pence, which is pretty close to what it is now," he said. "It's come up very fast, and there's not necessarily a great deal more to go for." The price was 13-1/2 times this year's earnings, falling to 11 times next year, and the Airbus deal, he felt, was already factored in. He stressed that he still saw the long-awaited Airbus deal as positive, although the sheer weight of accounting changes - one of which shifted all launch aid liabilities from Airbus owed to the UK government into AIC - would take some time to digest.

The directors of the new AIC gave their blessing to the A3XX, as well as estimating annual synergies of up to Euros 350 million from 2004 onwards. On a pro forma basis, the company stands to make operating profits of about Euros 1 billion on a Euros 15.7 billion turnover, making it the second biggest commercial aircraft manufacturer in the world, according to BAe European Aeronautic Defence and Space Company (EADS), the holder of the other 80 pct of AIC. BAe closed 9-1/2 pence better at 427-1/2 pence.

UK Smaller Cap shares closed in a firm position, bucking the wider FTSE indices and the DJIA, buoyed by a plethora of company news which helped to shrug off concerns ahead of next week's FOMC meeting. The FTSE Smaller Cap index closed up 17 points at 3379.5, only barely shy of its high of the day at 3379.8 and well above its low of 3,358.9. Late afternoon interest focused on Topps Tiles, which experienced a strong spurt shortly before the end of trading, on rumours of a weekend tip - there could be a bid in the offing. The shares rose nine pence to 279-1/2pence.

Technology stocks finished the day as it had started - mildly lower in unenthusiastic trading, and staying low on an early depression on the Nasdaq in New York. At the Friday close, the London techMARK was down 18.27points at 3,442.14 points, near the mid point of a 47-point range. In New York, the Nasdaq Composite index was down 32.55 to 3,904.29 at 5.11 pm. The index was rising after an early sell off triggered by negative analysts' comment on Amazon.com was counteracted by good results and positive news in the chip sector.

In London, the biggest movers were mainly on the downside. Vodafone AirTouch showed the biggest losses among the large-cap stocks, losing 13-1/4 to 295-1/2 as reports that Japanese mobile giant NTT DoCoMo was considering entering the UK market via a tie-up with Canada's TIW, winner of the fifth UK 3G mobile licence, and Hong Kong's Hutchison Whampoa.

Invensys

Invensys, the automation, control and power systems group, reported a 78 per cent decline in profits to £ 66 million. Meanwhile, the group's chairman said that the group's operating results reflected the significant benefits of the restructuring and integration following the merger, together with ongoing cost control. Sales in the automation and controls businesses were up sever per cent to £6,920 million and operating profits before exceptional items and goodwill amortisation were up 11 per cent, to £1,097 million (including acquisitions).

Invensys' Intelligent Automation division delivered a mixed year as a consequence of difficult capital goods markets. The software and systems businesses grew well with organic sales up three per cent, boosted by successful new software product launches. The flow control and instrumentation businesses were hit by customer cutbacks in capital spending and therefore suffered a decline in sales and profits. The division's iastore.com web-site is now established as the industry's leading e-commerce site, with sales growing month by month. Customers are also responding well to Invensys' new systems and service offerings - as well as the web-based connectivity that it is building into all new products and services. This division looks forward to a return to solid organic growth with increased backlog and improving order prospects.

The group's Industrial Drive Systems division demonstrated an improving performance after a tough year in 1998/99. Operating profits advanced as the division made progress in reducing costs and transferring production to lower-cost countries. The division also delivered revenue synergies by working with other Invensys companies and placing renewed emphasis on system solutions and services. With sales back on an upward curve and costs still coming down, it now has greater confidence going forward.

For Invensys Power Systems, this was an excellent year as sales climbed 25 per cent and profits rose 58 per cent. One of the key drivers of the merger was to create a global leader in the market in order to tap into the considerable IT and telecoms growth and their demand for clean, reliable power. All the signs are that buoyant telecoms and IT markets, combined with ongoing cost reductions, will continue to yield exciting growth in sales and margins at this division.

Meanwhile the Controls division also had an excellent year. Demand in the residential and commercial building automation markets continued to increase and the division was successful in expanding its product offering to include higher value - added systems, networks and

services.

Please note that the value of investments, and income (if any) yielded by them, may fall as well as rise, and you may not recover the full amount of your original investment. Past performance is not necessarily a guide to the future.