In the City
Muddling on
Nicholas Davenport
have lately been trying to argue that the investment institutions in the City, having been out of the equity market for some bull are now likely to come in and give us a market. Last week was the best seen for equities this year, for the index rose 18.8
Per Cent. But an unfortunate print error
uPset the force of my argument. The reason Why the institutions have hitherto been with holding funds from the equity market is 17.'neause they committed last year £2.7 bil1°n, bringing their total equity holding up fl.0.4 billion which was nearly 30 per ..,.`ent of their total long-term investments. lite misprint unfortunately gave 3 per cent. Now 30 per cent is a high proportion for equities in a life insurance portfolio. In my day as a mutual life office director 25 per cent was considered quite high enough. For Pension funds the equity total could be very Much higher. Indeed, Mr Ross Goobey rn,rned the Imperial Tobacco pension fund 'initially into an equity fund many years ago. But since the Tories lost office equity Investment has become much more of a Political risk. In fact, a bull market, which depends upon the conjuncture of favourable politics and favourable economics, can hardly exist at all under a socialist Government unless it is of the conservative Callaghan type which does not believe in taarlonalising everything, the City instituI°ns included. But City opinion is now turn against against Mr Callaghan. He is not regarded as strong enough or reliable en, °ugh to resist his wild nationalising peoFt. The revival of institutional investment eqUities, is therefore based either on the assumption that Mr Callaghan will lose the election or on the belief that there will be another 'hung' parliament which will make Little or no difference to company manattment and profits. The trade figures for June, published last b"eek, were not particularly helpful for a ell market, for they revealed a deficit of !06 million on visible trade and a surplus 910nly £14 million after allowing for invisIbbles. This made nonsense of Mr Healey's budget estimate of a £250 million surplus the half-year, the final result being a deficit of £81 million. But the market now besides, to ignore Mr Healey's estimates. 'esides, if you analyse the trade figures they are not so bad. In volume terms ",3rPorts rose by about 3 per cent in the halfAar and imports by 2 per cent. This does not suggest a consumer orgy. Invisibles ‘.'ere disappointing but as our financial institutions — insurance companies, Lloyds, Lbrokers, merchants, bankers and stockbrokers — alone brought in nearly £1800 II-union last year — a rise of some £500 mil — we need not worry about Invisibles'. Allowing for the continuing rise in oil revenues I would estimate that the 1978 over-all surplus on the balance of payments will now be under £500 million. Disappointing, but not a catastrophe. It is reassuring to see how new money continues to pour into the City week after week for its endless variety of purposes — for conversion into loans, take-overs and investment, not to mention the finance of government expenditures. It was the same in the Spectator days of Addison and Steele. It was a trickle then but it is a flood now. I estimate that it is now well over £8 billion a year, which is new money coming into the life and pension funds and insurance companies for investment. This is at the rate of £155 million a week. No wonder the Old Boys Brigade, who have to find ways of investing this huge sum every week, often drop into the modern equivalent of Jonathan's coffee house for a drink and chat about the money business and politics. Let us be thankful that the re-emergence of an equity bull market in Throgmorton
Street does not depend upon the summit
conferences of the great statesmen. If the
surplus countries can be persuaded to buy
more of our goods, so much the better. But the sale of our goods depends much more on our own abilities — on increasing our, productivity, on delivering on time, on improving our after-sales service. I was intrigued by a letter in The Times of 15th July from Tim Congdon, the economist of Messel's, demolishing the Cambridge school which stands for more government expenditure and protection. According to this school the reduction in the public sector borrowing requirements from an annual rate of £9 billion to about £4 billion in 1977-78 should have led to worse recession and more unemployment. Instead, the jobless total has declined, there are signs of recovery in output and there is a growing optimism about domestic demand. The reason is that Bank rate came down to 5 per cent in October last year (now alas! 10 per cent) which brought about a buoyant housing market and stimulated sales of consumer durables which are interest-rate sensitive. Cheaper money did the trick. I quote from an earlier article of Ambassador Peter Jay: a lower budget deficit permits lower interest rates, stimulates private sector expenditure and off-sets the fall in public sector deficit spending. This has long been the policy of my Keynesian 'cheap money' column. Forget Bonn. The re-emergence of a bull market in our native equities depends largely on the Old Boys' view that Britain muddles through.
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