Corporate profit worries hit shares

WORRIES about the effect on corporate profits growth of the slowing world economy hit share prices in London yesterday, despite a positive lead from Wall Street and international bond markets.

By the close, the FTSE 100 index had dropped 21.4 points to 3,726.1, almost its worst level of the day. "A lot of the weakness is due to people recognising that we're getting near to the results season and it is unlikely that they're going to be any pleasant surprises," said Mr Murray Wilson, a strategist at Nat West Securities.

Analysts are still revising down their forecasts for 1995 earnings growth and are also trimming their optimism about the outlook for 1996. A significant problem is that, on top of the slowdown in Britain, economies in Europe and the US are also looking weak.

The latest in a long series of profits warnings came from Prowting, the house builder. But another symptom of a slowing economy, in the form of expected weakness in US and European vehicle sales, hit engineering shares sharply.

The market received a brief lift from yet another record close on Wall Street, where the Dow Jones Industrial Average rose 52 points on Tuesday. At its best, shortly after the opening, Footsie was 10.5 points higher at 3,758.0.

But the initial gain soon dissipated, despite another spurt of bid activity, with the announcement of a bid for Lloyds Chemists from Gehe of Germany, rivalling an earlier offer from Unichem. There were hopes that Unichem might return with a counter offer.

Speculation about a possible bid for Pearson, which owns the Financial Times, refused to die, and there was a revival of the story that United News & Media might be selling the Express titles.

But in contrast to 1995, takeover rumours are not lifting the1 overall market and not even a good day for gilts helped equities. Tuesday's US Treasury bond auction was completed successfully, prompting a wave of relief in international bond markets, and the benchmark 10 year gilt finished around a third of a point higher.

But Mr Mark Brown, head of strategy and economics at ABN Amro Hoare Govett, says "Over the last couple of weeks there has been a shift of perception in global bond markets in reaction to the latest round of interest rate cuts. ,The policy priority is seen to have, moved away from controlling inflation towards reviving the real economy. The bond market may have turned an important corner.,

As a result of this, equity valuations nave got stretched relative to bonds. Mr Wilson of NatWest points out that the yield on the All Share index has got dangerously close to the real yield on index linked gilts, normally a warning sign for shares.

Shares trickled lower in the afternoon, and for once, traders could not blame Wall Street. The Dow was around four points higher at the close of London trading.

Volume was 705.5 million shares, of which around 56 per cent was in non FTSE 100 stocks.