In the City
Poor investors
Nicholas Davenport
Some ass in a position of authority recently said that the individual investor was finished because he did not know how to look after his savings and was disinvesting himself of company stocks and shares at the rate of over £1000 million a year. The statistic is apparently correct but there is a special reason for it. The Stock Exchange has just issued a leaflet giving the explanatory facts and urging the individual investor to come back into the market and help private enterprise to raise money in the City. It points out that when we have a socialist government enlarging the public sector and borrowing money at higher and higher rates of interest the individual investor gets scared, plays for safety and puts his savings into bank deposits, building societies and government bonds.
Of course it has to be borne in mind that a socialist government is always beastly to investors. We have to pay a 2 per cent stamp duty when we buy stocks and shares in the market; we have to pay an excessive capital gains tax which is not even indexed for inflation; we are limited to a 10 per cent annual growth in dividends (if available); and, worst of all, we have to pay an income tax surcharge on investment income, although investment income comes out of savings left over after the payment of earned income tax.
Over 50 per cent of the holdings of company shares is now in hands of institutions, like unit trusts and life and pension funds (whose annual cash flow for investment, swollen by the inflation, is now reaching 10 billion.) The amount held by private investors is not precisely known. One estimate is that private investors number no more than 3i million. The chairman of the Stock Exchange, Mr Goodison, puts it at 2i million. He is quoted as saying that the traumatic slump in the equity share market at the end of 1974, when some leading companies could be bought on a price-earnings ratio of under 5, undermined investors' confidence. But the undermining of investment confidence went back much further than 1974. It began after 1960 when equity shares first became an imperfect hedge against inflation and the cult of the equity collapsed.
Looking back, the cult of the equity, Lulminating in the two great Tory booms of 1952/55 and 1958/60, was the most extraordinary obsession which ever took hold of the City. It had a rational enough base, namely, the new economic policies to which all Western capitalist gov ernments were committed after the war — full employment and growth. Growth meant an annual increase in the gross national product and therefore in the turnover and gross trading profits of companies. This gave to the equity share markets a secular upward trend, for it was assumed that dividends would rise more or less proportionately to the rise in turnover and profits. The cult began to vanish when it was realised that full employment and growth could not be maintained simultaneously with price stability. The power of the unions in so-called free collective bargaining ensured that wages would rise faster than productivity.
The failure of the Tory `stop-go' monetary policies to curb inflation and the disastrous attempts of the following Labour governments to protect the value of money finally convinced the private investor that the equity share was no hedge against inflation and could become an undesirable risk under socialism. This was brought to a head in the great slump of 1974 when the City thought that private enterprise was finished. But investment confidence began to return when a socialist Chancellor, Mr Healey, relieved companies of paying corporation tax on the inflated value of their stock-in-trade. Some companies found that they had very little tax to pay — except, of course, on the dividends they paid out. It might be said that after Mr Healey had come to the tax rescue of companies in 1975 a bull market in equity shares was restored and with the inevitable ups and downs has continued ever since. The F.T. index has recently touched 550 — a wonderful recovery from the 146 of the 1974 slump.
The outlook for company profits is not quite as good as it was, seeing that wage costs are rising strongly again and the much dearer pound is hurting the export trade and cheapening imports. The Messel economists have made a valuable estimate of companies' appropriation accounts for 1978/79 and 1979/80. Two thirds of the large increase in company profits is accounted for by the North Sea oil group and after removing this group they estimate company profits at £16 billion and £16.9 billion for the two years. After allowing for fixed capital formation the over-all deficit moves up from £3346 million to £4294 million which will require new issues of share capital. Even so they think that dividends will continue to grow and that share prices will be maintained. This is not particularly bullish but if the Tories are returned there is certain to be a removal or relaxation of dividend control and brokers are already drawing up lists of companies whose dividends will go up. This is the basis for the next Tory bull market which the City is eagerly awaiting, but 1 bet that it will not last as long as the erratic bull market of 1974/79, under — God help us. all — Mr Healey.