THE BANKERS AND THE EQUITY BOOM
By NICHOLAS DAVENPORT SEVERAL of the bank chairmen had some rude things to say in their annual statements about Stock Exchange prices. Lord Aldenham, of the Westminster, with a gay disregard of metaphor warned equity shareholders that when they were reading their barometers as set fair it was time `to watch your step.' Does he really prefer gilt-edged stocks as a nest-egg to fall back on—on a rainy day? He is not likely to attract many investors into a Government bond market which has become the sport of the dear money managers and away from an equity market which is being driven upwards by the inexorable law of supply and demand—too much money chasing too few shares. It is strange that the bank chairmen had domestic to say on this all-important, if technical, `4/1hestie matter and so much to say on the state of the world outside. It was the joint stock banks, of course, which set their seal to the bull market. As soon as the credit squeeze was ended and the restrictions lifted from hire-purchase in the summer of 1958, they finance heavily into the leading hire-purchase 'mance companies and raised more capital from their shareholders on very favourable 'rights' terms. As a result a furious scramble for bank and finance shares developed and for the equities of the companies engaged in the consumer trades and in the manufacture of consumer 'durables.' This bank-financed consumer trade boom is now beginning to spill over into the capital goods Industries and is frightening the Chancellor out of his Bank rate senses, but as far as the Stock txchange is concerned confidence is unshaken. In fact, the equity boom has never really looked back since the joint stock banks joined in the bull movement. Not until the last few weeks, when, the first 'secondary reaction' has been seen. ,Why has there been no 'secondary reaction' 'elore? The primary reason is that this has been boom paid for in.cash—not financed on brokers' Stock Exchange is negligible. The new hard money which has poured into equity shares comes from three main sources. First, the insurance companies and Pension funds. The National Institute of Economic and Social Research estimate that the increase in the funds of the life assurance com- panies and the superannuation schemes last year atale:7:a million. On the basis of recent practice quarter, and probably a third, of this Increment went into equity shares. Next, the trust oldtirriedft:ining pmaortniceuylar the unit trusts which have been into equities last year at the rate about £1 million a week. Third, the private inves- tor ,, Whose ranks have been swelled by the small neW investor attracted by the capital profits to be out of a market which for two years has never ad any serious setback. (One of these newcomers he womn—recently ra told BB intrviewr in Panoraama rogmmea thatC e she chosee her Flares by sticking a pin into the back page of the 21ancial Times and seemed to do as well as the more Painstaking researchers after `growth.') How m 11°1 new money the private investor has put into ,9vuities last year it is difficult to say, but there was iincery big increase in personal savings and a fair L,rease in personal borrowing at the banks. (Only de'ird Monckton among the bank chairmen Oned to give us any idea of what the borrower
was doing and he suggested that about half the personal loans went into motor- cars. My guess is that nearly a half went into the Stock Exchange.) I would put personal new invest- ment at not under £70 million a year, which gives me a total of at least £300 to £320 million for the new demand for equities last year. In addition there is the constant switching of old funds from gilt-edged to equities. The latest is the LCC, which is putting 25 per cent. of its superannuation fund into equities. The supply of new equity shares was not equal to the demand. So prices had to rise to balance the account.
By contrast the supply of Government stocks has remained in excess of the demand. This market has never really recovered from the huge addition of stock caused by the war and the national- isation of the Bank of England, the gas and electricity companies, the coal mines, the railways, some road companies and cables and wireless during the Labour Government. No new demand was created for Government stocks during the Conservative regime because Treasury policy has been to reduce the supply of bank money and at the , same time to allow the life assurance com- panies freedom to switch funds into equities which should normally go into fixed interest to match their purely money obligations.
The idea that the Treasury can check the equity share boom just by putting up Bank rate is antediluvian. Equity shares will fall when the institutional buyer holds off the market and the small investor sells. This has been seen to some extent in recent weeks. What has been causing the institutional investor to postpone his buying is that he sees uncertainties abroad—in France, the USA and Africa—which might turn out to the disadvantage of world trade and our own exports. Equity share yields today do not allow for any such risk: they postulate a permanent blue sky. The market is therefore vulnerable to external shocks.
The fact that the average dividend yield on the Financial Times index of industrial shares is around 3.9 per cent. and the earnings yield 8.6 per cent, against a yield on Government 'longs' of 5f per cent. is not in itself a dangerous feature. Equity share yields are largely a matter of custom and fashion. It is customary and fashionable to buy the leading equities on the Continent on a yield basis of 21 per cent. Provided the economic prospect is set fair our own equities could approach that level. But today the economic prospect abroad is cloudy and if the Treasury makes the mistake of reading the domestic economic signs as inflationary when they are not, trouble will follow which the Stock Exchange will quickly discount. The bankers can leave the market to look after itself; it certainly knows how to read an economic barometer as well as Lord Aldenham. If the bankers could only restrain the issues of new unit trusts they would do more to ease pressure of demand for equities than any amount of hostile talk.
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