The Capital Market-3
The European Bourses
By NICHOLAS
DAVENPORT THE earthquake in Wall Street was felt throughout the Western world. The great shock on 'Black Monday' (May 28), when the American Dow Jones average fell by thirty-five points, or nearly 6 per cent., caused most of the European bourses to suffer their worst tumble. The slump in Zurich was outstanding. This was not surprising, for it quotes a greater number of foreign securities than any other European market and is generally regarded as the international barometer. (Over a quarter of the shares dealt in are foreign.) Moreover, Americans use it as their main European exchange (there is no objection- able 2 per cent. stamp duty on transfers as there is in London) and the turnover is relatively high. Amsterdam, being next to Zurich the most sen- sitive international exchange, also reacted sharply: Paris remained, as one would expect, predominantly local and concerned with French politics, but it did not escape the wave of liquidation. Italian investors are not allowed to buy foreign securities — the recent decline in Milan has been due to the proposed nationalisa- tion of the electric-power companies, whose shares have fallen by 20 per cent.—but they, too, have been affected by the Wall Street slump. These are the falls which the European bourses had suffered this year by the end of 'Black Mon- day' week : Germany 28 per cent. (over 40 per cent. since the all-time high of September, 1960); Switzerland 38 per cent.; Holland 21 per cent. (over 30 per cent, since its high of April, 1961); France 16f per cent.; Italy 11 per cent.; and Belgium 7 per cent. (this bourse had already been deflated by the Congo debacle). This compares with a fall this year of 131 per cent. in London (Financial Times index) and 20 per cent. in Wall Street (Dow Jones index). But let us not forget that since May, 1961, London has fallen one hun- dred points, or nearly 30 per cent.
Some recovery has now been made, notably in Germany, but if we were to estimate what the fall means in money terms we should be staggered by the figures. As a guess I would say that American investors have lost in paper values since last December about $50,000 million (f 18,000 million). British investors have seen, since the high of May, 1961, nearly £10,000 million disappear. In Europe the continental capi- talists must feel something like £2,000 million poorer.
This is by no means the end of the capitalist system. Paper losses of this order have been suffered before; recoveries of greater extent have been enjoyed before; and down the years the holders of securities—the paper titles to real estate, to factories, to plant, to skilled manage- ment and labour—have all become very much wealthier than their parents. But two questions arise. First, why have all the stock exchanges in the Western world suffered a slump at the same time? Second, does this foreshadow a trade recession?
The answer to the first is not a simple one. There is the technical influence of the American capitalist whose money has poured into London and continental centres over the past two years, partly for portfolio investment, partly for direct investment in factories and plant. The rising costs of manufacture in the United States have driven the American businessman to Europe, where labour is cheaper and the market io consumer durable goods less saturated. When the Ameri- can capitalist gets into trouble in Wall Street he tends to draw in his funds from Europe. Next, there is the widespread feeling among the business community in every country in the West, where profit margins have been steadily squeezed for the past twelve months, that demo- cratic governments are unable to control a wage- cost inflation, and that when they are pressed by labour they are quite willing to sacrifice profits to secure a temporary stability. A wages policy, even in countries which have long acknowledged one (such as Sweden and Holland), no longer seems to work. In the case of the United States, Great Britain and Germany inflationary wage settlements have recently been followed by government interference in the fixing of prices. President Kennedy attacked the steel companies so violently that they had to cancel the price increase that followed the wage rise; Mr. Lloyd has so deflated the British eco- nomy. that rising wage costs cannot be passed on to the consumer; and Dr. Erhard tried hard to stop the Volkswagen company from raising its prices. Dr. Erhard failed (no wonder, seeing that German wages will rise 9 per cent. this year), but it was enough to shake business con- fidence. As far as the L.) and the UK are con- cerned, it is no exaggeration to say that the businessmen have completely lost confi- dence in their Government's ability to under- stand the profit motive and make the capitalist system work. This does not apply to France, but, then, France is not a democracy. All this has made the investor realise—curiously enough, at much the same time in different countries— that economic growth at a constant rate cannot be relied on for any nation, that profit growth at a constant rate for any company or any in- dustrial group is an illusion, that equity shares valued at more than twenty times their future estimated earnings will collapse when business sentiment changes from optimism to pessimism, from confidence to distrust.
Finally, does this foreshadow a trade reces- sion? I have said that a bad stock exchange slump can induce or accelerate a recession, for the lack of business confidence which it creates causes the capital-spenders to cut down their capital programmes. Moreover, the disappear- ance of capital profits and the realisation of losses always tend to depress consumer spending. But I would not say that the present slump on the bourses has in itself made a recession inevitable. It has not been bad enough. It has not reduced security prices, as the great slump of 1928-29 did, to a fraction of their former values. Broadly speaking, it has merely lopped off the great rise of the past two years, which is by no means a catastrophe. Yet sometimes a stock exchange slump does uncannily anticipate a coming trade recession. The American recovery is slowing down, the investment boom in Europe, which reached its peak in 1961, is coming to an end, dear Britain is, as usual, stagnating. These are the facts: small wonder the capital markets are bearish.
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