Outlook: Brown not causing the meltdown but he will feel the effect

Good news for the Chancellor. Shares actually went up yesterday. Despite what some commentators might argue, Gordon Brown is no more responsible for the collapse of the London stock market than he was for the meteoric rise which followed Labour's election victory six years ago.

Between polling day in May, 1997 and its peak on New Year's Eve, 1999 the FTSE 100 index rose 55 per cent. By last night's close it had fallen by 50 per cent. To assert, however, that the Chancellor was responsible for either movement in the index is to invest a lot more power in the hands of one politician than even Mr Brown wields. If the Chancellor dares to take credit for the recovery in equities which most pundits still expect over the next two to three years, then no one will believe him either. These days, markets are too big, too powerful and too international for elected governments to have that degree of influence.

Rather, the role of any government and any chancellor is to provide a stable macro-economic climate in which both businesses and stock markets can flourish. By and large, Mr Brown has been remarkably successful at that. Real interest rates are at a 38-year low, unemployment is at a 30-year low and inflation is benign. Moreover, the Government of which Mr Brown is a member has largely ignored the siren calls of the labour movement to roll back the industrial relations reforms and market liberalisation which characterised the Thatcher years. You only have to look at the handling of the fire fighters strike to recognise that New Labour is no friend of old-fashioned trade unionism.

But, Mr Brown's detractors argue, look as well at the mountain of hidden taxes and red tape that the Chancellor has heaped on business. In the United States that has not happened and today Wall Street is some 2,000 points higher than it would be had US shares tracked the London market.

The Chancellor is not without fault in this respect. The abolition of dividend tax credits is undoubtedly a reform Labour will come to regret, even though Mr Brown would argue that, along with the windfall tax, it enabled him to turn some of his redistributive instincts into action. Compare Mr Brown's approach with that of the Bush administration which is abolishing taxes on dividends altogether.

That said, fiscal policy has only played a small part in the decoupling of London share prices from those in New York. There have been many other factors at play. One is that when the hi-tech bubble burst the FTSE 100 suffered disproportionately against the Dow and the S&P 500 because of the number of technology stocks in the index. Another has been the relative weakness of the dollar which has aided the wealth creating parts of the US economy whereas the strength of sterling has acted as a drag on UK manufacturing exporters.

But perhaps the biggest factor of all has been the premium which Wall Street commands because of the perceived strength of the US economy, born of its dynamism and superior record on productivity. The relative underperformance of the British economy has been a problem for a long time. Mr Brown is not the cause of it but the manifestation in the stock markets must nevertheless be a concern.

Cazenove

Mr Brown is not the only victim of the stock market. Yesterday Cazenove bowed to the inevitable and abandoned its planned flotation this spring. It would be incorrect to say that Caz has postponed a public listing since it cannot give a new date for when it might dip its toe in the water.

It is not really a blow to the blue-bloods of Tokenhouse Yard since Caz needs neither the access to capital nor the means of retaining talent that a flotation would bring. Its unique brand of investment banking is not particularly capital hungry since Caz has survived by being nimble of foot and independent of spirit rather than fat of pocket. Nor is it the case that staff will defect or choose not to work for Caz in the first place because it lacks the currency of conventionally traded shares with which to lure them. Rather, the trick in the City at the moment is to hang on to your job, if you have one.

Cazenove hardly needs reminding what a dire state the markets are in. Last year its profits fell by a third and it shed some 200 staff and this year it is not betting on any improvement. The feeding frenzy sparked off by the Safeway bid battle emphasises how little corporate advisory work is around. As for the IPO market, so far there has been just one new entrant this year, ToTravel which has raised the princely sum of £1.5m. Scarcely an act one of the best know names in the City would wish to follow.

The decision to introduce some form of internal market so that the traders at Caz can trade their own shares is a recognition that it cannot keep staff sweet for ever with promises of jam tomorrow.

The failure to float also raises the inevitable question of whether Caz can remain independent. Just as the abrupt departure of its chairman-elect David Verey did last August. The answer is the same. Independence is not a theological absolute, it is a business model which is capable of creating value. Caz proved it when times were fat. Now it must do so when they are thin.

Safeway saga

So we won't get a fast-track bid for Safeway after all. If we can glean one thing from yesterday's statement from Philip Green it is that the financial bidders for Britain's fourth largest supermarket group might not get quite the clear run from the regulators they had hoped for.

That the Office of Fair Trading has seen fit to ask Mr Green to make a formal submission regarding his bid shows that it will be scrutinising financial bids just as closely as those from rival supermarkets.

The issues are quite different, of course. With Sainsbury's, Wal-Mart-Asda and Tesco the stumbling blocks will be market domination and local monopolies. With Mr Green and Kohlberg Kravis Roberts the OFT is entitled to ask about the viability of a leveraged Safeway and how strong a competitor it will be to the big three when it is staggering around under £4bn of debt. They could ask for guarantees that the business will be run as a going concern and not broken up. And if any subsequent disposals are made they could call those in for review too. Whether Mr Green and his backers would want to proceed on that basis is anyone's guess.

In the short term, though, Mr Green has lost his time advantage and if does not make his submission to the OFT soon he could even find that all the other bids have been ruled on by the regulators before his. No wonder the bookies lengthened the odds on a successful Green bid.

With Safeway's shares falling in a flat market yesterday traders have cottoned on to the fact that there will be no quick conclusion to this saga. We are in for the long haul.

But there are sure to be fireworks before long. They could come from Wal-Mart, which could launch a dawn raid on Safeway's shares, as it did with its Asda bid in 1999. And what if Wal-Mart is talking to Marks & Spencer about M&S picking up the stores Wal-Mart would need to dispose?

In the meantime, though, the market seems to have forgotten that this bid will be decided on regulatory grounds first and price second. So far we have had lots of noise but only one firm bid, from William Morrison, and it is currently worth the princely sum of 217p a share. What if six bidders came to the party and only one ended up staying? Safeway shares have got ahead of themselves and there is a strong argument for profit taking.

m.harrison@independent.co.uk