City Confidential Newsletter

Looking back over 2007 it was really a year of two halves as foot- ball pundits might say! When we went to press at the end of 2006 the FTSE-100 Share Index stood at 6,220.8. At the time we thought that 2007 would see a contin- uation of the progress seen in 2006 when the Index rose from 5,618.8 to 6,220.8. In fact we forecast that the Index would rise to a level of around 6,700 by the time the year drew to a close.

We looked to be well on track by the end of June with the Index reaching 6,607.9 by the end of that month. However, the credit squeeze which followed soon meant that most of these gains were given up and the second half of the year saw the market become very volatile with it falling to a low of 5,858.9 in August before recovering again.

Given the current uncertainties prevailing in the market, it is clear that making predictions for where the Index will go in 2008 is fraught with danger. However, we normal- ly do stick our neck out and make such predictions and this year should be no exception. Last year the Index only held up so well due to the performance of the mining sector with companies such as BHP Billiton almost doubling over the year, whilst the heavyweight oil stocks BPand Royal Dutch Shell also showed useful gains. These helped to overcome the dreadful showing of the Banking sector which saw significant share price falls of over 35% in the likes of Royal Bank of Scotland and Barclays, whilst the largest quoted UK bank, HSBC also saw a drop in its share price of around 13%. The current year is unlikely to see such a strong performance from resource stocks despite the fact that com- modity prices, including oil, are likely to remain firm. However, it also seems very unlikely that the Banking sector could perform as badly as it did in 2007 and we believe that there could be a strong recovery in banking shares over the next twelve months or so. As we have highlighted on this page before the high divi- dend yields offered by the banks should provide sig- nificant support and it will be interesting to see what happens in the bank results reporting season in February. If the dividends which are currently being forecast are confirmed when the banks report then a significant bounce in bank- ing shares could result dragging the rest of the market up with it.

Many other companies have also seen significant falls in share price over the last twelve months and again these share prices are now bol- stered by the fact that the dividend yields are so attractive. Although economic growth in the UK is set to slow much of this is now factored into share prices and this gives us some comfort as we start the new year. We are therefore predicting that the overall market will rise again this year and believe that the Index will end the year at somewhere around its all time high at 6,930.

NEWS UPDATE

THE MEDICAL HOUSE – 20.5p (AIM)
Yet more positive news has been announced by the medical devices company The Medical House with the news that it has agreed to dis- pose of its loss-making sub-con- tract engineering company Eurocut to Sernes Ltd. The latter has agreed to pay up to £3.7m in aggregate for the company including inter-com- pany loans although the first pay- ment will not be made until the beginning of 2009.

The disposal will enable the group to focus all of its resources on growing the profitable Drug Delivery Division, which is seen very much as the future of the group. The deal also completes a dramatic turnaround in the banking arrangements at the group, as in the past four months cash received and debts leaving the group have totalled £4.5m. The result is that the group now has a modest bank overdraft and no long-term debt.

The group will start 2008 in its best ever financial position and the disposal of Eurocut eliminates the risk of it incurring further losses which could result from Eurocut’s rather erratic order profile. Despite the good news reported over the last couple of months, the shares still languish at around our recommen- dation price of 20.5p last November. They are a STRONG BUY

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