Worries over hedge funds send LSE to four-year low

Date: Wednesday, January 21, 2009
Author: Robert Lindsay, Times Online.co.uk

Shares in the London Stock Exchange dropped nearly 10 per cent or 50½p to a four-year low of 463½p amid fears that its trading update tomorrow will show another dramatic slump in the value of equities traded as struggling hedge funds withdraw cash.

Dame Clara Furse, the outgoing chief executive, has seen a 77 per cent fall in the share price of Europe’s biggest stock market from its £19.77 peak a year ago as it has been bedevilled by falling equity volumes and mounting competition from electronic platforms such as Chi-X and Bats. Direct Edge in the US, which has a deal with London’s Plus Markets, yesterday announced that it would convert to an exchange in the last quarter of this year.

Credit Suisse cut its target price to 495p and slashed earnings forecasts, saying the value of equities traded in London had fallen by about 30 per cent in the last three months of 2008 against a year ago and it expected these falls to continue.

Dirk Hoffmann-Becking of Bernstein Research believes that the LSE’s move to provide a platform for trading contracts for difference could eventually make up for falling share of equity volumes but for now he is maintaining neutral advice, believing that until the LSE makes fundamental changes to its cost structure it will not be able to see off a profit slump.

The FTSE 100 fell 17.07 to 4,091.4 as confidence in the balance sheets of Britain’s high street banks continued to plummet, with Lloyds Banking Group down 20.2p to 44.8p, Barclays down 15.1p at 72.9p and Royal Bank of Scotland off 1.3p at 10.3p. The worry is that regulatory capital reserves or “tier one equity” ratios are continuing to weaken. Merrill Lynch’s Manus Costel-lo set a 60p price target on Lloyds, saying that by the end of March its reserves would not provide “enough of a cushion to withstand the coming wave of bad debts. We see a capital deficit of £10.1 billion. If this deficit were closed, we see a possible 72 per cent government ownership.”

Centrica fell 2½p to 272p as Citigroup pressured it to drop its planned £3.1 billion purchase of a quarter of British Energy, the nuclear generator, from EDF. It said that given recent falls in energy prices, if BE was still listed, it would be trading below 500p while Centrica has promised to match EDF’s 774p top-of-the-market price. The deal will dilute Centrica’s earnings and it will have to put in more cash as EDF invests. Centrica is still finalising terms but there is no sign yet that it has changed its mind.

Property developers slumped again, making a 21 per cent fall in the real estate index since Anthony Bolton, former Fidelity star, called the bottom last month. Land Securities, down 53p at 659p, announced another jump in the proportion of vacant premises. It is struggling to let its St David’s centre in Cardiff, a joint venture with Liberty International, down 15p at 425p. Hammerson fell 35½p to 410p, British Landlost 37¾p to 410p, CLS Holdings was down 75½p at 275p, Brixton fell 14½p to 105p and Segro lost 21¼p to 168¾p.

— New York: The dawn of the Obama presidency could not shake Wall Street out of its dejection over the banks’ growing problems. After hearing the inaugural address, investors continued selling and at the close the Dow Jones industrial average was down 332.13 points at 7,949.09.