The great steel bonanza MONEY
NICHOLAS DAVENPORT
I have always thought that the Stock Exchange should have erected a statue to Dalton on the floor of the 'House.' No other Chancellor brought such a torrent of new business to the mass of jobbers and brokers. The fact is that the 1945-51 Labour governnient restored com- plete liquidity to the private owners of the fisz or six industries selected for nationalisation. As the fair compensation awarded was handed out in the form of Government bonds, which could be cashed on the active gilt-edged market which Dalton had manipulated for his cheap money drive, the expropriated suddenly found themselves with Stock Exchange buying power to the extent of nearly £3,000 million. Many owners of unsaleable coal shares, railway stock and local gas stock were virtually given the cash to re-invest in 'good growth' equities and in the ten years following 1951 they succeeded in doubling their money. Capital in liquid form has always been more valuable to the investor than income. This is a platitude in the City but it may come as a shock to the innocent socialist who imagines that nationalisation is intended to deprive the wicked capitalist of a productive asset and secure a wider distribution of wealth. The nationalisation of steel does not compare in size with the 1945/51 hand-out but it adds a useful £520 million of Govern ment .bonds shortly to be thrust into private hands.
It also provided certain financial institutions, with a special bonus'on top of the £520 million. The Act of steel nationalisation allowed for 'terminal' dividends to be paid by the steel companies 'as soon as possible' after Vesting Day (July 28th). These dividends will be paid net of tax at 8s 3d (this is admirably called 'franked income'). Gross funds and the institu- tions which are taxed as finance houses will be able to claim back the tax which has been deducted. Many of them will make use of the franked income as a set-off against tax on their own dividends. Further, having bought the steel shares at an excess price over the nationalisation price—because of the net ter- minal dividends added—the finance houses will be able to claim a capital loss on nationalisation which can be set against their dividends and gains for tax purposes. So you can imagine how attractive these steel shares have become to many City institutions. The normal turnover in the steel market has lately. quadrupled. The news that Mr Heath intends to band the steel industry back to private enterprise if his party is returned to power has naturally been wel- comed by the Stock Exchange, if by no one else. It would mean another steel bonanza.
Mr Callaghan is no doubt anxious to avoid repeating Dalton's technique of priming the gilt-edged market with a surfeit of bank money in order to issue the steel nationalisation stock at the dearest possible price. He has already enjoyed a remarkably strong recovery in the gilt-edged market which has carried War Loan up from 47: to 53 to yield 6.6 per cent (against '.3 per cent). He has taken full advantage of the fall in interest rates abroad and with his third cut in Bank rate the opinion is now held that he has.gone as far as he can.
Indeed, - there is some apprehension that with a renewed upsurge in the American economy, not to mention the escalation of the war in Vietnam, money will become tighter in New York in the autumn and us interest rates will move upward again. So Mr Callaghan was well advised to advance the vesting' date for steel and prepare the market for the new stock while the going is good. It is thought that he will make a two-fold tap issue of a short and a medium-to-long stock. If the gilt-edged market were to need any stimulus at the time of issue the Chancellor could release the special deposits of the banks which are frozen in the Bank of England.
With bank advances showing little rise this influx of money could find its way into bank investments and assist the steel operation. But, although Mr Callaghan is not anxious to emulate the tactics of his famous predecessor, he may be forced to do so. So far he has been a paragon of virtue in his dealings with the gilt-edged market. When the recent recovery was showing signs of unhealthy pace he damped it down by the issue of hundreds of millions of tap stock, so covering his borrow- ing requirements far ahead. But the steam has now gone out of the market. In fact, confidence has been thoroughly upset by the bad trade re- turns and the coming rise in gas and electricity charges. The Government broker has already been forced to support the market—much earlier than Mr Callaghan could have antici- pated. This is a bad omen for the steel issue and the Chancellor may be looking before long for bank money support as Dalton did.
The huge turnover in steel shares—so greedily devoured by the institutions—has, of course, put good money (after bad) in the hands of the private holders of the equities who will take £130 million of the total £520 million. Some of the now happily dispossessed have naturally been looking round the Stock markets for alternative ordinary shares. Their purchases have been a fillip to the whole market and the Financial Times index of industrial equities rose to 348 (22+ per cent above its 1966 low) before it ran into a little trouble. It is surprising to find a leading firm of brokers interpreting this rise as the beginning of the next 'bull' market. They appear to believe that company profitability has stopped falling and may even have started to rise. There is no statistical evidence to support this cheerful view. Certainly Mr Callaghan has not yet begun to reflate the economy, for the budget was disinflationary.
The sweeping Tory victories in the local elec- tions may, of course, induce Mr Wilson to begin reflating before Mr Callaghan believes that it is necessary but the more sensible ex- planation of the rise in equities is that the demand from expropriated steel shareholders fell upon a market which is still short of stock. In the first four months of this year only £9 mil- lion of new equity shares were issued against £45 million in the first four months of 1966. Yet the new money coming into equities from the life funds and the unit trusts was at the rate of nearly £80 million in that period. Clearly the market price of equities had to rise. But it has risen far enough for equity shares now to appear expensive. The average dividend
yield on the Financial Times index is Only 5.4 per cent against 6.6 per cent on War Loan. It is still possible to find a cheap equity to buy but one has to go outside the limited field of the 'blue chips' and scout Along the second grade shares which are so frequently the bene- ficiaries of take-over bids. And that can be very rewarding! The Stock Exchange would be a very dull place without the take-over bid. Especially this biggest take-over of all—in steel
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