City fears about Labour refuse to go away

The City still harbours widespread fears about the effect of a Labour Party election victory on key industries, according to fund managers, bankers and analysts.

Labour's economic policies are more acceptable to the City than for many years, despite the row over Clause Four.

But there are worries that the party's interventionist instincts are still intact where individual industries are concerned, and that shares in electricity, water, transport, gas, the banks and other politically sensitive companies will be in for a roughride as the election looms.

The attack on the banks' profits and charges on Monday by Gordon Brown, the shadow Chancellor, was seen in some quarters as a foretaste of Labour plans for greater regulation and control by the state.

Alastair Ross-Goobey, chief executive of Postel, Britain's biggest investor, and a former adviser to Norman Lamont, said that when the Labour Party embraced the markets, it "remained in fear of the infection it might get".

But he believed the Tories' fortunes had been so low over the past year that the political risk of a change of government had already been priced into the market. "People aren't frightened of the Labour rhetoric, as they were five to ten years ago."

The traditional City scepticism about Labour economic policies appears to have moderated to polite interest, thanks to the new leadership.

There has as yet been no repeat of the "prawn cocktail offensive" in which John Smith, the late Labour leader who was shadow Chancellor before the last election, went on an intensive tour of the City over many months.

With some success, he put across the image of Labour as economically responsible, and was credited with allaying much of the paranoia in the markets that had dogged the party in previous elections.

This time round, Gordon Brown has so far proved an elusive guest. A top banker said he was extremely hard to entice to the lunch table. But Alastair Darling, the City spokesman on his team, has been seen around the City more often and is also willing to be involved in the detail of what happens. He is, for example, on a tax law review committee with Mr Ross-Goobey.

And Common Campaign was launched just before Christmas by a group of Labour supporters to identify sympathisers in the business world. Roger Warren-Evans, managing director of Common Campaign - not formally run by the Labour Party - said the response in the first three weeks had been excellent. "A large number of people are keen to support Labour without making an explicit commitment or contributing directly to party funds," he said.

Economists working in the Square Mile saw the outbreak of Clause Four hostilities as a minor irritation, though there is some concern that if Tony Blair lost on this issue it would be a disturbing indication that he is unable to control the reactionary old guard in his party.

However, Simon Briscoe, an economist at the investment bank SG Warburg, said: "Labour's economic policies are more acceptable to the City than at any time in living memory."

He said the party's public commitment to keeping an inflation target was more important than the wrangle over Clause Four, although this did leave a nagging doubt about internal pressures the leadership might face in government.

The prospect of dealing with a Labour government in the relatively near future makes some senior City figures coy about talking publicly. Their instinctive distrust of Labour is still evident.

The boss of a big UK merchant bank said: "Blair has got a long way to go before he proves himself. It's like a bull market - anyone can make money in a bull market. It takes a bear market to sort out the men from the boys. Blair still has to sort out hispolicies and his party."

The head of another merchant bank said: "It's striking how very little has been decided by Labour, which makes me uneasy. It may come to power with nothing but a list of soundbites. It risks a shambles."

One City fund manager agreed the concern was not Labour's economic and monetary policies, which seemed unlikely to be a dramatic change from the Tories', but the tendency for Labour's "centralised dictatorial attitude to resurface" through intervention

in taxation and in business issues affecting specific sectors.

However, the party had moved towards a market-friendly attitude and there was little fear of a return to "Bennite rhetoric" - which was what would "really scare the horses".

David Morgan, chief executive of M&G, the unit trust and investment group, thought specific worries about Labour policies were still not apparent in the markets, partly because policies had not yet crystallised.

The market's main focus now, he believed, was not on a change of government but on whether bonds had bottomed out, which was a precondition for increasing confidence in equities. "I honestly don't think Labour is a major factor," he said.

But M&G had arranged a series of lunches with key Labour policy makers and he expected the issue to be taken much more seriously closer to an election.

Geoffrey Dicks, UK economist at NatWest Markets, said it was important that Labour honoured its commitment not to reverse the monetary policy arrangements introduced by Kenneth Clarke, the Chancellor. "They would not have much choice - the danger of a sterling crisis would be too great."

Robert Buckland, an equity strategist at the same bank, said his institutional clients in the UK and overseas were constantly citing political concerns as a reason for not trusting the excellent economic growth Britain was experiencing at the moment.

But he did not believe the equity market had yet thought much about the detailed implications of a Labour victory. Its most urgent worry was the risk of a Tory tax giveaway to woo voters. It could lead to another cycle of boom and bust.

He added: "One thing Labour could really do to secure credibility with the City is to commit itself further to a more independent stance for the Bank of England."

Roger Barker, an equity strategist at UBS, the Swiss investment bank in the City, said it was too early to take a change to a Labour government into account, but this time next year the markets would start to bring the issue on board. Investment clients regularly discussed the Labour Party, but its prospects had not yet been reflected in the price of shares.

James Barty, UK economist at Morgan Grenfell, said: "Mr Blair has a lot more convincing to do. Most people in the City would like to see more detail on the policies, but nobody will focus on the implications until much closer to the general election."