PITY THE INVESTMENT MANAGERS!
By NICHOLAS DAVENPORT
LAST week, when the Financial Times index of ordinary shares
dropped to a new `low'—three
points below the slump of the Suez cTisis and the lowest level seen for three and a half )ears---most investment managers would have -111Ped at the chance of joining the Americans at the South Pole where the climate is predictable. What hat makes the task of investment so exasperat- ing today is that one has to read and interpret not only the economic but the political signs, which to a businessman seem often lunatic. It is difficult enough to forecast changes in the profitabilities of different industries, even when the businessmen are left to work out their own economic destinies, but when trade is continually being affected by fumbling Government attempts to change the eon --nomic weather—through monetary measures, fixation, controls, restrictions, exhortations—it is really more than the plain, honest investment manager can stomach. It might not be so bad if governments always knew what they were doing, economically, but they don't; they often don't know the right thing to do or how to do it, if they did. The present Government's constant use of the flank rate weapon, although it has confessed to having no precise knowledge of its business efiects, has convinced most investment managers that the political manipulation of the economy is quite unpredictable.
investment experience over the past twelve Months will show that this is no idle complaint. 'lb
Period I will examine starts with a strong Market recovery in industrial equity shares after the Worst of the Suez crisis. Remember that the bear market had started in July, 1955, in anticipa- tion of the Government's deflationary measures. su`demand' inflation had been officially diag- nosed, dearer money and tighter credit followed and severe restrictions were imposed on hire Purchase. The motor industry was the chief suf- ferer, for the Government deliberately set out to cause a slump in the home trade in order to in- crease exports. This part of their economic policy s brilliantly successful. Motor shares duly roped and for half a year the great British h'lotor Corporation traded at a loss. But the result
of
- the Government's deflationary measures as a Whole was to halt the rise in industrial output, lower industrial efficiency and put up industrial costs. To quote a conservative pro-Government Paper, lest I should be accused of political bias : short runs, underutilisation of capital equipment, Concealed unemployment through the retention of surplus labour, these are all natural conse- quences of restricting the expansion that would naturally flow from an investment boom at its Productive stage. The effect on prices was exag- gerated in that while output did not rise; wages did, and the effect on costs was exaggerated by dear money.' That quotation is from the Financial Times of February 15.
The post-Suez recovery in equity shares was helped by the feeling that at long last the Govern- ment favoured a cautious re-expansion of the economy. The Budget confirmed that market impression. Both Chancellor and Prime Minister rejected the idea of such a severe monetary defla- tion as would directly cause unemployment. Then followed the round of wage increases which induced Mr. Thorneycroft to adopt the savage Policy he had only recently rejected. For months he kept silent about his change of mind. The
market naturally assumed that wage-cost inflation had taken hold and that the Government could not control it. There was a mad rush after ordinary shares, which rose nearly 30 per cent. from the Suez 'low,' and a slump in the gilt- edged market. This persuaded the Council of Lloyds to allow their underwriters to switch half their deposits from gilt-edged into ordinary shares, the Church of England Commissioners to increase their already large equity holdings, and the authors of the Labour pamphlet on State, pensions to boast that the pension fund trustees would be allowed to climb on the equity band- wagon. At the same time there developed a flight into dollar equity shares, and the Kuwait 'leak' convinced the Government that this was a danger- ous flight from the pound, which had to be stopped at all costs.
* * *
Now it was certainly rash on the part of the investment managers to rush into equity shares in the first half of last year, not on a sober revalua- tion of their earnings prospects but on a wild inflation scare. But how could they have antici- pated that Mr. Thorneycroft would change his policy secretly overnight and give hard money and the fixed exchange value of the pound priority over full employment and industrial expansion? And how could any City man in his senses have anticipated a 7 per cent. Bank rate in September? By that time trade in North America was turning down and no investment manager would have be- lieved it possible that after a sharp fall in world commodity prices and the start of an American recession a British Chancellor would try to export a 7 per cent. deflation to the whole sterling area.
If an investment council were to _meet in the City today to consider the new Chancellor's policy they would have to adjourn in despair without a decision. Mr. Amory does not officially recognise a recession, although each month dis- closes a fresh rise in unemployment (it will soon reach 2 per cent.), a fresh drop in vacancies, a worsening of the export trade and a further fal- ling off in productive investment. Meanwhile, the North American recession gathers momen- tum at an alarming rate. Unemployment in the US is nearly 6 per cent. of the labour force: in Canada it is over 61 per cent. The poor investment managers are at their wits' end. At the moment they are scared of dollar equities and their selling of them has brought the dollar premium down to 4 per cent. But they are not buying British equities : they are escaping into gilt-edged stocks, convertible debentures, and gold shares—the last on the desperate chance that the American slump will at last frighten Washington into writing up the price of gold. Certainly the American Govern- ment has been forced into desperate spending on defence and public works to halt the recession while our own Government goes blindly on exporting its 7 per cent. deflation to the sterling area, which may well turn the American recession into a world slump. If the investment managers now conclude that the capitalist world has gone mad, who shall blame them?
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