European Business News (EBN), 97-02-26

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From: The European Business News Server at <http://www.ebn.co.uk/>

Page last updated February 26 1800 CET

CONTENTS

[01] Greenspan questions `sustainability' of stock market prices

[02] Greenspan's bearish comments send global markets into a slump

[03] BAe profits jump 38% as company focuses on aerospace and defence businesses

[04] Elf Aquitaine profits soar 42% as production and prices rise

[05] French consumer spending jumps a hardy 1.9% in January

[06] Sumitomo chairman quits, taking responsibility for copper scandal

[07] Pharmacia & Upjohn posts 24% earnings drop for '96 after merger charges

[08] Standard Chartered operating profit gains 25%

[09] UK trade deficit unexpectedly narrowed in December as oil exports dropped

[10] Prudential operating profit rises 14% as company focuses on core operations

[11] EVC swings to a loss as margins, weak markets take their toll

[12] Corporate and Economic Briefs

[01] Greenspan questions `sustainability' of stock market prices

But Greenspan, in the first leg of his semiannual Humphrey Hawkins testimony before Congress, stressed that the Fed doesn't 'have a firm view' that equity prices are 'necessarily excessive' or that risk spreads are 'patently too low' in the current market environment.

Even so, Greenspan's comments sent most European and US markets nosediving as rational caution took hold of traders, as he reiterated his concern about 'irrational exuberance' in asset markets.

The Fed chief said the central bank hasn't yet found a 'satisfactory answer' to that 'irrational exuberance' in the markets and that there are reasons in the current environment to 'keep this question on the table.'

'Clearly, when people are exposed to long periods of relative economic tranquility, they seem invariably prone to complacency about the future,' Greenspan told the Senate Banking Committee. Against that backdrop, the Federal Open Market Committee 'has to be sensitive to indications of even slowly building imbalances, whatever their source, that, by fostering the emergence of inflation pressures, would ultimately threaten healthy economic expansion.'

The performance of the U.S. economy over the past year has been 'quite favorable' but that the Fed continues to see the risk of inflation biased to the upside. The Fed, he said, remains on 'alert' for imbalances in the economy that might disrupt the expansion, now approaching its seventh year.

Greenspan said 'the FOMC continues to see the distribution of inflation risks skewed to the upside and must remain especially alert to the possible emergence of imbalances in financial and product markets that ultimately could endanger the maintenance of the low-inflation environment. Sustainable economic expansion for 1997 and beyond depends on it.'

He also said that against the backdrop of tight markets, the FOMC has recognised 'the need to remain vigilant' for signs of potentially inflationary imbalances that might, if not corrected promptly, undermine the U.S. economic expansion. The FOMC has signalled 'a state of heightened alert' for possible monetary tightening since last July in its policy directives, he said.

However, Greenspan said the Fed has 'taken care' not to act prematurely to raise interest rates, noting that the FOMC refrained from changing policy last summer despite expecttions of a near-term policy tightening by many financial market participants.

So far, inflation has 'remained quiescent' since then, Greenspan said. Still, he stressed that the Fed can't rule out a situation in which a pre- emptive policy tightening may become appropriate before any sign of actual higher inflation becomes evident.

If the FOMC were to implement such an action, Greenspan said, it would be judged that the risks to the economic expansion of waiting longer had increased 'unduly' and had begun to outweigh the advantages of waiting for uncertainties to be reduced by the accumulation of more information about trends.

Greenspan said he finds it 'ironic' that the Fed's policy tightening actions in 1994 and 1995 were criticized by some because inflation didn't turn upward. 'That outcome, of course, was the intent of the tightening, and I am satisfied that our actions then were both necessary and effective, and helped foster the continued economic expansion.'

[02] Greenspan's bearish comments send global markets into a slump

Despite the downturn in stock and bond markets though, observers were less than surprised by Greenspan's comments, which came in the first of two days of testimony before the US Senate.

Consequently, yesterday's declines were subdued compared to the reaction to Greenspan's remarks last December about 'irrational exuberance' in US asset markets, which caused a temporary nose-dive in stocks on both sides of the Atlantic.

'The danger was always going to be on the downside,' said Panmure Gordon & Co. Ltd. equities strategist Ian Williams. Williams said US interest rates are now considered likely to rise in the short-term. Also, he said a booming labour market will inevitably have a negative impact on equity valuations in the US.

Shares in London, Frankfurt and Paris which had been marking time ahead of the keynote speech dipped minutes after Greenspan spoke although he delivered a largely upbeat assessment of the US economy.

But investors took fright as Greenspan warned that financial markets, including investors in stocks and junk bonds, may be over-optimistic about the economic outlook and urged caution.

Yesterday in London, Europe's biggest bourse, was badly hit, sliding by 0.5% as Greenspan cast a cloud over investors. London and other European bourses have been trading at record levels in recent weeks.

Wall Street made a negative opening, with the Dow Jones Industrial Average plummeting 100 points before rebounding to about 60 points down. The Treasury long bond had fallen about 1 4/32 to yield 6.74% in midday trading.

Most European investors were rattled by the prospect of inflationary pressure pushing up interest rates in the US economy which will affect the rest of the world.

In Paris, shares fell 0.4% on the strength of Greenspan's warning. Frankfurt too was down in computerised trade before recovering somewhat. Floor trade which ended before Greenspan spoke closed up a few points.

On the currency front, the dollar recovered most of its losses after dropping by nearly two yen and half a pfennig as dealers grew jittery ahead of the testimony.

The US currency was up one pfennig on Tuesday's closing levels in Europe as currency dealers saw a hint of interest rate boosts in Greenspan's remarks making the dollar a more attractive to investors.

Meanwhile, bond markets slid as Greenspan took a tough stance on asset valuations. For many Fed watchers, Greenspan's language was unusually plain and sent a clear message to the market. 'I think the shock to the market was that Greenspan is indicating in no uncertain terms that he's prepared to tighten before he sees the whites of the eyes of inflation,' said David Jones, chief economist at Aubrey G. Lanston.

'We cannot rule out a situation in which a pre-emptive policy tightening may become appropriate before any signs of actual higher inflation becomes evident,' Greenspan said in his prepared remarks.

Greenspan's testimony 'is clearly bearish, but on a scale of one to 10, where one is the most bearish, it's probably a three,' said Cary Leahey, senior economist at Lehman Brothers Government Securities Inc. Leahey noted that Greenspan's comments were the most bearish since July 1993, several months before a surprise Fed tightening in February 1994.

'I think the Street was beginning to bet that he wasn't going to tighten at all, or that if he did, it wouldn't be until later in the year,' Jones said. 'It's a wake-up call.'

Greenspan's testimony also dwelled on labour costs, noting that the era of workers' willingness to trade higher wage increases for job security - one of the factors that has kept inflation in check - may be coming to an end.

'If heightened job insecurity is the most significant explanation of the break with the past in recent years, thin it is important to recognise that...suppressed wage cost growth as a consequence of job insecurity can be carried only so far,' Greenspan said.

[03] BAe profits jump 38% as company focuses on aerospace and defence businesses

The UK defence contractor said pre-tax profit jumped 38% to £456 million ($730 million), excluding exceptional items. The company said the result was driven by record orders and strong margins after radical restructuring. BAe returned the group's focus to its core businesses of aerospace and defence, after its disastrous diversification into cars and property.

'It is very easy to forget we were £1.2 billion in debt four years ago,' Finance Director Richard Lapthorne told AP-Dow Jones in an interview.

Chairman Bob Bauman said 1996 was a 'successful year for British Aerospace, further demonstrating the benefits of pursuing a strategy of focusing on our strengths in aerospace and defence.'

He added that continuous productivity improvements and cost controls added to the overall performance. 'These results provide additional support to our confidence for the future, he said, adding that as a consequence the company was raising its dividend 25% to 15.625 pence a share.

Richard Evans, chief executive, said the company is one of the U.K.'s most successful exporters, with 87% of its sales last year to overseas markets.

Looking ahead, Evans said that Airbus Industrie could be the key to the restructuring of the European aerospace industry as a whole. He said British Aerospace would prefer a European wide restructuring with different companies taking stakes in common ventures, as in the case of Airbus.

Evans added that the timing and outcome of restructuring in the aerospace industry remains unpredictable and in the meantime management will focus on enhancing shareholder return from established business units.

BAe said during the year it strengthened international relationships with the completion of the Matra/BAe Dynamics guided missiles joint venture with Lagardere of France.

'In addition, good progress has been made to further strengthen the successful Airbus partnership with agreement to develop the business into a more streamlined single corporate structure,' said BAe.

BAe's defence division showed an 18% lift in sales over the year, while profit before interest rose 14% to £554 million. BAe said its commercial aerospace division reduced its trading loss over the period on the back of increased profitability from Airbus and shrinking losses in regional aircraft.

'The market for large commercial aircraft has already improved strongly and further growth is anticipated,' said BAe.

[04] Elf Aquitaine profits soar 42% as production and prices rise

Elf, France's biggest company, said operating income jumped 44% to 22.3 billion francs, while revenue rose 11.7% to 232.7 billion francs. The company said it would increase its net dividend to 14 francs a share from 13 francs.

Elf Chief Financial Officer Bruno Weymuller declined to forecast 1997 earnings, pointing out its dependence largely on the direction of crude oil prices. A $1 variation in the price of crude oil adds or subtracts 1.5 billion francs ($267 million) to the company's operating income, Weymuller said.

Last year, oil prices rose 21% to an average $20.70 a barrel from $17 in 1995.

[05] French consumer spending jumps a hardy 1.9% in January

The national statistics agency INSEE said a 4.4% rise in retail spending more than compensated for a continuing decline in car sales. January is the month when French retailers hold their post-Christmas discount sales.

Spending on cars, which has been declining since the end of government car- buying incentives in September, fell 11.5% in January.

However, INSEE revised its initial December data to show a drop of 1.3% compared with the previous estimate of a more limited decline of 0.8%.

Some economists said the January data signalled strong demand for the first quarter of the year, despite the December revision. But others said overall spending remained weak as the job market and consumer sentiment are depressed.

is depressed and consumer sentiment is The January household consumption followed data earlier in the week showing a record 1996 trade surplus and a survey noting a marked that businesses are increasingly expecting to see a pick-up in industrial production during the coming months.

[06] Sumitomo chairman quits, taking responsibility for copper scandal

Speaking to reporters at a press conference, Akiyama said he had intended to resign `as early as possible' after Sumitomo's copper trading losses came to light in June 1996. Akiyama said he postponed resigning his post until now in order to support the new president, Kenji Miyahara, in handling `one of the gravest situations since the company was founded.'

As reported, the company's former trader, Yasuo Hamanaka, has been accused of posting unauthorised copper trading losses on international markets.

Hamanaka pleaded guilty last week to forging signatures and causing huge loses for the company through off-the-book dealings.

Akiyama said that Sumitomo's internal probe into the scandal is likely to conclude around autumn, after the next shareholders' meeting in June. But the former chairman added that Sumitomo is more certain than ever before that its management had no involvement with the illegal trades.

Two senior Sumitomo officials have expressed their desire to resign from their current posts as a result of the copper trading scandal, former Chairman Akiyama said.

Ryo Yamakawa, senior managing director, and Akio Imamura, a director, have both voiced their interest in reliniquishing their posts, but a final decision won't be made until the next shareholders' meeting in June, Akiyama said.

Regarding Sumitomo's current dealings in the copper market, President Miyahara said that while the company has `not retreated' from the market, it has reduced its copper trading `somewhat.' Miyahara said that the company will combine its commodities and financial market trading into one department to improve its market risk management system.

Sumitomo will integrate its trading operations into one to make it more globally competitive, Miyahara said. He dismissed allegations, however, that the company's risk management system has been inadequate until now.

`In retrospect, there could have been room for improvement, but the fundamental (risk) management system has always been sound,' Miyahara said.

Two senior Sumitomo officials expressed their desire to resign from their current posts as a result of the copper trading scandal, former Chairman Akiyama said.

Ryo Yamakawa, senior managing director, and Akio Imamura, a director, have both voiced their interest in reliniquishing their posts, but a final decision won't be made until the next shareholders' meeting in June, Akiyama said.

Regarding Sumitomo's current dealings in the copper market, President Miyahara said that while the company has `not retreated' from the market, it has reduced its copper trading `somewhat.'

Miyahara said the company will combine its commodities and financial market trading into one department to improve its market risk management system.

Sumitomo will integrate its trading operations into one to make it more globally competitive, Miyahara said. He dismissed allegations, however, that the company's risk management system has been inadequate until now. `In retrospect, there could have been room for improvement, but the fundamental (risk) management system has always been sound,' Miyahara said.

[07] Pharmacia & Upjohn posts 24% earnings drop for '96 after merger charges

Pharmacia & Upjohn said net profit dropped to $562 million from $739 million the year before.

Sales for the full year rose 3% to $7.18 billion, while in the final quarter they gained 7% to $1.94 billion.

The 1996 rise in net sales was driven by new-product performance and by marketing synergies, the company said. It added that it will concentrate this year on investing in new-product introductions, some of which are coming sooner than expected.

In the fourth quarter, net profit after nonrecurring items was $226 million, or 43 cents a share, compared with $38 million, or 0.07 cents a share, in 1995.

'We were satisfied with our fourth-quarter earnings per share,' said Jan Ekberg, acting president and chief executive officer. 'However, margin improvements were not up to expectations, and we have many challenges ahead.'

'Our focus in 1997 will be to build and consolidate our position to generate longer-term strong performance,' Ekberg said. Ekberg is acting as president and CEO after John Zabriskie hastily left the company Jan. 19, but will only serve during the search for a new CEO.

The 1996 sales growth was led by Camptosar, which sold for around $59 million and Xalatan with around $30 million. In the fourth quarter, pressure on prices and sales of older products continued to constrain sales growth and sales outside the US accounted for 68% of fourth-quarter net sales, compared with 70% for the same period last year.

'Sales incentives helped boost US sales during the final three months 1996, ' said the company.

[08] Standard Chartered operating profit gains 25%

Pre-tax profit, which included a £45 million gain from the disposal of assets, rose 32% to £870 million.

Chief Executive Malcolm Williamson hinted that costs may rise this year, saying, 'We now need more than ever to invest for growth in order to meet our key objective of positioning the group as a focused, international bank for the new millennium.'

He elaborated that the group will increase revenue through the development of a strong sales and service culture, to invest in its people, in technology and in creating a strong Standard Chartered brand.

Standard Chartered reported a 'slight slowdown in Singapore and some other economies' in its key Asia Pacific region during 1996, but said it remains positive about the region's prospects in 1997. 'The Asia Pacific region remains key to our future. There was a slight slowdown in Singapore and other economies during 1996 but indications are positive for 1997,' Gillam said.

Growth in Malaysia and Hong Kong was strong, the group said, reiterating its commitment to investing in these countries in the future.

Overall, profits in the group's personal banking division increased more than 27%; its consumer finance arm produced 21% profits growth; and profits on the corporate banking side, including institutional banking and custody, increased 27%.

[09] UK trade deficit unexpectedly narrowed in December as oil exports dropped

Exports rose 1.5% in December from November and imports rose 0.5%. In November, the trade deficit totalled a revised £1 billion; economists had expected the deficit to expand to £1.1 billion in December.

Britain's oil surplus, at £664 million, was the highest since January 1986.

Economic Secretary to the Treasury Angela Knight said that 'the competitive strength of British industry shines through today's figures, supporting a wider trading performance, as strong as it has been for a decade.'

For 1996 as a whole, the trade deficit expanded to a provisional £12.5 billion from £11.6-billion in 1995. Total export and import volumes last year both rose by 9%, with the European Union accounting for nearly 60% of the total.

Exports to EU member states rose by 7% and those to non-EU countries rose by 12%. Imports from EU countries rose by 6% while those from non-EU countries rose by 13%.

[10] Prudential operating profit rises 14% as company focuses on core operations

Prudential also said operating profit, the preferred measure of profitability for insurers, rose 14% to £691 million from £604 million.

The insurer said it posted a profit of £766 million, on the disposal of Mercantile & General, the reinsurance company it sold to Switzerland's Swiss Reinsurance Co. for £1.75 billion in August.

The highlight of Prudential's operations were in the US, where Jackson National Life saw operating profit rise 35% to $512 million, while single premium sales rose 73% to $3.8 billion. The unit plans to begin sales in New York state, the largest insurance market in the US, in 1997.

The dividend was raised by 10% to 17.3 pence a share.

The year was described as 'very successful' by the Pru's chief executive Sir Peter Davis. He said that with the disposal of Mercantile & General and launch of Prudential Banking, considerable progress had been made in focusing the group on those markets where the Pru had the expertise and the critical mass to generate real value for shareholders.

[11] EVC swings to a loss as margins, weak markets take their toll

The company, Europe's fourth largest maker of poly-vinyl chloride, or PVC, said it expects 'an improved result' this year as demand for PVC improves.

Nevertheless, the company said that its forecast for 1997 is uncertain and that it hopes to shore up earnings by continued cost cutting.

Company executives added that they may consider a second share buyback as a way of improving 'shareholder value. EVC said it swung to a loss of 25 million guilders ($13.2 million) for the year. In 1995, EVC made a net profit of 163.9 million guilders. Sales in 1996 slid 17% to 2.08 billion guilders.

Finance Director Nigel Taylor said the results were a lot better during this market downturn then they had been in the last downturn of the early nineties and he credited ongoing restructuring as having made the difference. 'There is substantial underlying improvement in the group's competitive position,' Taylor said.

EVC turned profitable in 1995 after three years of operating losses. The company, which was set up as a joint venture of Imperial Chemical Industries of the UK and Enichem of Italy, generates 64% of its sales in Italy, the UK and Germany.

[12] Corporate and Economic Briefs

Bouygues chairman Martin Bouygues and other executives with the construction company are being questioned this week by an investigative magistrate over illegal payments to win contracts, according to investigative weekly newspaper Le Canard Enchaine. Bouygues said it wouldn't comment on the report. The newspaper said judge Jean-Marie Charpier has been investigating a false billings system for the past two years that allowed Bouygues or its subsidiaries to win several large contracts, including a FF1.6 billion contract to participate in the construction of the new national library in Paris. The judge also is investigating an alleged Bouygues slush fund held at a Swiss bank, Le Canard Enchaine said.

Poland's current account deficit widened by $368 million in December to $1.35 billion for the year, the National Bank of Poland said. The current account deficit in 1996 is in contrast to a current account surplus of $5.46 billion in 1995. And the trade deficit widened by $958 million in December to $8.15 billion for the year, the central bank said. The figures were preliminary.

Carrefour posted a rise in 1996 net operating profit of 20% to 3.24 billion French francs from 2.69 billion francs. However, the French supermarket group said net profit slipped 12% to 3.1 billion francs from 3.54 billion francs as a result of a one-time losses totaling 116 million francs, compared with a one-time gain the previous year of 846 million francs. Revenues last year rose 7.1% to FF154.9 billion from 144.6 billion francs. Carrefour said it would pay a net dividend of 26 francs a share, compared with 21.3 francs a share for 1995.

Commercial Union, affected by the strength of sterling, reported a 13% drop in 1996 operating pre-tax profit to 444 million pounds ($726.2 million). The company offered a final dividend of 18.85 pence per share making a total 30.30 pence for the full year.

A qualified majority of over 70% of pilots at German flagship airline Deutsche Lufthansa are in favour of a general strike, the DAG white- collar workers union said. The union's wage commission covering Lufthansa on Friday will begin discussing whether to hold the strike, the DAG said. In response to the results, Lufthansa said there isn't any immediate danger of a strike and that the lack of full support among employees for a strike is 'a clear mandate' for further negotiations.

The Czech trade deficit is seen widening to 45 billion koruna in the first quarter, up from 26.3 billion koruna in the same period of 1996, the Czech Statistical Office said, reporting results from a research among 170 companies. About 67% of 170 companies turned in the filled out questionnaires to the CSU. These companies altogether had a 20% share of total imports in 1996 and a 36% share of total exports, the CSU said.

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