LOOKING BACKWARD AND FORWARD
BY NICHOLAS DAVENPORT IT has been a depressing and frustrating Year for anyone whose savings have been invested on the Stock Exchange. To my Socialist friends who want to tax capital gains I would say Please go ahead, but tell me first how to make them, or, once made, how to keep them.' If a reasonable and fair capital gains tax were already on the statute book we would now be looking forward to recovering some of our losses from the Inland Revenue. For in 1956 Old Consols or `Daltons' fell by about 10 per cent.—the gilt-edged group as a whole only by about 71 per cent.—while the index of industrial equity shares, after falling by 25 per cent. at one time (the Suez crisis at the end of November), finished after the December recovery at about 13 per cent. down. It might have been much worse.
What made the year so frustrating for the investor was that Government appeals for more and more savings were followed by a steady and persistent fall in the gilt-edged market. `Invest in success' became the slogan of a cheat. Just hand over your arms, said the Treasury security police to the spending rebels—and you will be shot in Throgmorton Street the next day between 10 and 3.30. It was not because the security Police were vicious; it was just that they were ignorant—loyal to a stupid monetary regime which did not know how to have a Money squeeze without a high Bank rate. It is to the credit of the Chancellor that he came to the rescue of the private investor before the end of the year by offering him better terms on Savings Certificates and Defence Bonds free of depreciation and by giving him a little'utter on Premium Bonds without risk of capital. But it is by no means clear that the Treasury has learned the 1956 lesson of the gilt-edged market, which is not the simple one of investors preferring equity shards to bonds in a period of rising Prices. (Prices have been pretty stable since May.) The qesson for the Treasury is that it cannot control or manipulate the gilt- edged market without exercising some con- trol over the investments as well as the advances of the joint stock banks. This means prescribing the liquidity ratios of the banks (which are now over 37 per cent.) after first forcibly funding a proportion of their Treasury bills. The end of the year banking figures are not available as I write but it looks as if bank investments will be down by over €110 million. The Treasury Must learn how to use its powers to direct bank investments as well as advances. It Will then be able to proceed with its neces- sary funding issues at a higher and more respectable level of prices in the gilt-edged market. This was a year of humiliation for British Government credit and it must never be repeated.
* * * Returning to the individual equity Markets, it should not have been difficult for the expert investor this year to beat the index. Although some groups suffered severely—motors, cinemas, radio, hire- Purchase stores, newspapers, plastics, build- ing materials being worse than the index— other groups, like breweries, suffered very little, while shipping, aircraft and oil finished up on balance. There was obviously great scope for what is known as 'switching' in spite of the fact that stamp duty and commission cost about 5 per cent. The sharpest movements were of course seen in oil shares. A clever investor could have made as big a killing out of BP as the Church of England made out of Trinidad Oil, and if he had seen the trouble coming in the Middle East he could have switched from BP into Ultramar and enjoyed a rise of over 50 per cent. The oil market has still the biggest scope for movement and after its recent deflation offers more hope of profit than of loss. As compared with these lively oils the dullest share on the Stock Exchange must be the respectable Coats, which has fluctuated between 25s. 71d. and 21s. 11d. and is now 22s. 6d. And the most depressing market last year was in gold shares which, after some recovery in the early months, went steadily downwards until last week when it seemed to have steadied itself. Even the devaluation talk never put life into it. On the whole the year has been a very difficult one for the equity investor who has been holding on to his favoured shares on the prospect of inflation—only to end up with an industrial crisis over Suez which promises deflation. Clearly he would have done better to have switched into dollar shares which on the averages were slightly higher at the end of the year. Old favourites like International Nickel have risen over 40 per cent.
Looking forward, what is the investment prospect? Surely a recovery—much over- due—awaits the gilt-edged market if the Treasury knows its business. As for in- dustrial shares, not only are profit margins being cut but net profits must now be falling. The managements are obviously going to have a most difficult six months while the Suez crisis lasts; 1957 will be a worse year for industry than 1956. Has the equity share market discounted it? It has been so taken up with inflation that when it discovers that deflation is the Suez outcome it may begin seriously to discount the lower profits and dividends awaiting so many companies. The bear market which began in July, 1955, may therefore last a full two years. But when the Suez crisis has been overcome and the Stock Exchange sees a prospect of industrial recovery in 1958 it will not wait five minutes before it begins to turn upwards. The `bulls' in Throgmorton Street always have a much stronger constitution than the 'bears.'
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