In the City
The conventional investor
Nicholas Davenport
For the conventional investor 1978 was a dreary year. For the nimble speculator it was exciting enough. Gold burst out of its dollar shackles and if the speculator had got out of the market near its summer top and jumped into Krugerrands he could have made a thumping profit. The conventional investor was not much better off at the end than he was at the beginning of the year.
I have a soft spot for the conventional investor, for I have the feeling that he may read this column. He is of a disappearing race of men. The individual holder of shares is now in a minority. The majority holders today are life and pension funds, colleges, charitable bodies and unit trusts. The disappearing upper middle class were traditionally holders of a portfolio of stocks and shares and the richer among them really expected their widows to live on the income — instead of finding another man quickly. They took advice, of course, from stockbrokers and accountants but they generally were unable to keep their portfolios inflation-proof. Besides they have to pay an unjust capital gains tax — in money, not real, terms — whenever they could miraculously secure a profit.
The question of portfolio profit depends mostly on timing — the timing of entry into the market. This is where I can sometimes help, for it is my professional job to try and spot the beginnings and ends of bull markets. Gone are the days when the Spectator simply required the City column to recommend lists of shares. When Wilson Harris, was editor — he was himself a small investor — he asked his City writer to suggest six new shares every week. It must have given him permanent indigestion.
As it happens we have in the London market some of the best 'blue chips' in the capitalist world. The management of our top companies is usually first-class — it goes wrong, of course, occasionally — and their profit record is as good as the economy can allow. Take the largest— Imperial Chemical Industries. You can almost calculate their profit from the output indices of Britain and the Continent after making due allowances for variations in the sterling exchange rate. Look at the records of our industrial giants like GEC, Pilkington Brothers, British Oxygen, Metal Box, London Brick and the cement and building companies. Consider the superb managements of our consumer trade leaders — Marks and Spencer, Great Universal Stores, Sainsbury, Tesco — not to mention the brewery combines, the food and drink and leisure companies etc. Any of the leading stockbrokers could build up a good portfolio from the British establishment of really successful profit-earners in the capitalist world.
The difficulty about portfolio building in 1978 was, as I have said, the question of timing. The year began with the stock market still reacting downwards from the great bull market of 1976/77 when an advance of 100 per cent had been secured in under twelve months. From its peak of 549 in September 1977 the index had dropped to 433 on 3 March 1978, a fail of over 20 per cent. Some financial writers were talking glibly of a bear market but I held the view that the old bull market was merely in suspense. A recovery followed which took the index up to 535 by 14 September, after which it has been steadily falling away and is now around 480.
The reason why I do not believe that a bear trend can take hold of the market at the moment is that the life and pensioni funds are under-invested in equities. They have about £8 billion of new money which has to be invested each year and a proportion of this money — about 25 per cent or more — must be put into equity shares whenever there is a market reaction. Otherwise they would never get invested. The only occasion when a real bear market can take over is when the managers of the life and pension funds go on strike, that is, withhold their money from the market on account of some political panic or unheaval. This occurred in 1974 when they imagined that the free capitalist system was about to collapse. The panic could happen again if they thought that the extreme socialist left was about to replace Mr Callaghan with large-scale nationalisation, wealth tax, trade union officials on boards of directors, and a government commission to direct investment of the institutional flow of funds.
The blight of left-wing socialism has already fallen upon the oil share market which used to be the most favoured haven of the conventional investor in the old days. If you look at a chart of oil share prices relative to the general index you will find that the investment status of oil shares has been declining sharply for the past two years and is only now beginning to stabilise. The reason for this decline is the nasty high-handed way that the Minister of Energy, Mr Benn, has been treating the oil companies in the North Sea. Before the first barrel of oil had even been produced the Labour government had introduced a completely new tax to take an increased share of North Sea profits for the state. Now, when about half the initial discoveries are in production Mr Benn has plans on foot to increase once more the government 'take' or grab in flagrant breach of earlier prom ises. No wonder our leading oil shares have been under-performing the market.
Of coufse, oil profits have been deressed by the falling dollar, which cuts into their sterling income, and by the recent decline of 'down-stream' profits of the refining companies, but the companies can now look forward to a rise in prices in the new year, partly from OPEC and partly from the hold-up in Iran. BP has risen this year from 808 to 926 and Shell from just over 500 to 576. But these prices still reflect the blight of socialism. If dividend restraint were removed these oil shares would jump. BP Is carrying forward 7.9 pence per share which it could not pay in dividend in 1977. Shell was restricted to a gross dividend of 26.2 pence in 1978 and if dividend restraint were removed, and the Shell dividend were to be aligned with that of Royal Dutch, the gross payment would rise fo some 48 pence.
All this confirms me in my view that the equity market cannot fall very far. The fund managers have got to be invested and they know that, politics apart, the leading shares of the British Establishment are cheap, particularly oil. There will, of course, be some investors who do not back their country, who regard the British Establishment as moribund. They will go to a professional manager and ask him to choose shares for them in Japan, Hong Kong, Australia, the US and even the European continent. They will, of course, have to pay the investment dollar premium -now 37i per cent-and they will have to follow blindly the advice of the professionals for they will have no personal knowledge of these foreign markets. Looking at the charts of the overseas bourses I can find only two and Paris —where prices have really soared this year. New York has had a shake-out from September onwards, Amsterdam too, Hong Kong ni November, Sydney and Frankfurt In October and Zurich for most of the year Tokyo has outshone every other bourse, but the fact that most of its equities are now priced at over twenty times earnings makes me feel that they are vulnerable. But the Japanese are a peculiar people and very advanced in robot production. quote from the report of one professional fund manager: 'We visited again Fujitsu Fanuc, the automated maker of automated machine tools, where we were astonished to Observe a self-generative process under way with about ten robot machines of various sizes grinding and spitting in unison attended by one diminutive white-coated worker with spectacles. All of them were making Mark 2 robots'. Can you see 3 factory worker in the British Establishmentt turning out robot machines to make hirnselL redundant? It would be impossible. I can imagine the Trade Unit Trust giving orders to its managers not to buy the shares of UnY company manufacturing labour-saviq robot machines. The Trade Union Unit Trust is like all conventional investors — the conservative type who do not like revolutionary change. Bless their hearts and Stock Exchange business.
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