Stormy new year in the City MONEY
NICHOLAS DAVENPORT
The mood of the City after its New Year nights of escapism remains much like the mood of industry which Lord Watkinson described on BBC Panorama as 'sick, frustrated and angry.' Especially angry. This is only to be expected for two important reasons.
In the first place, the Jenkins axe is poised to fall at home. Whenever a LabOur Chan- cellor has been moved hitherto to cut expendi- ture at home he usually takes a swipe at industry or the City in order to keep his left wing happy. In July 1966 it was a' 10 per cent surcharge on surtax. In November 1967, when he put the export industry on its feet by de- valuing the £, he gave it two black eyes—one by removing the tax rebate and the SET sub; sidy and another by increasing corporation tax from 40 per cent to 424 per cent. For the start of 1968 Mr Jenkins is therefore expected to excel in beastliness. The most common talk is of a swingeing gift tax. A wealth tax is not anticipated, for this would cause the final break- • down in the Inland Revenue inspecting and collecting offices, but a gift tax would be simple to administer. Further, there are bound to be some further penalties or punishments laid upon the export of our bodies or our wealth abroad. It is, clear that uncommitted capital would like to escape from socialist Britain under the present administration. The invest- ment dollar premium has risen to 30 per cent since devaluation—equivalent to 52 per cent pre- devaluation—which indicates that the managers of our investment trusts distrust this Govern- ment, put little faith in the efficacy of a 14.3 per cent devaluation and are expecting something more or worse. Mr Callaghan missed the chance of a voluntary, non-mandatory scheme for the loaning of 25 per cent of our foreign portfolios (which were valued at £3,500 million before devaluation) and this may force Mr Jenkins to take some action to put port- folio investment abroad under subjection. As the Government itself is responsible for this absurdly high dollar premium—by reducing the supply of investment dollars with its 25 per cent 'grab' and by increasing the demand for them from industry—the most likely action is ' to refuse industry future access to the invest- ment pool and to abolish the 25 per cent 'grab' for any portfolio which disinvests 25 per cent over a period. This would be reasonable enough, for business people would still be able to make direct investment abroad out of ree tained profits or foreign loans, but at this late hour the new Chancellor may feel compelled to take even more drastic and unpleasant action. It is a real threat.
In the second place, the mood of the City remains sick because the international financial crisis is clearly continuing, developing and getting nearer and nearer to an explosion. The dollar is now under frontal attack. The Ameri- can President has just announced a • stern five- point programme for curbing us diredt invest- ment and bank lending abroad, restraining foreign travel, cutting foreign aid not tied to exports, reducing military and civil expendi- tures in Germany and elsewhere and increasing the American trade surplus. This is bound to make conditions worse for the Inc and Europe. Now the French may decide to up-value gold in terms of the franc if they see recession loom- ing ahead and if they feel unable to force America to raise the dollar price of gold. (The Johnson measures lessen the chance of the US Treasury having to suspend gold shipments at Fort Knox.) We may see a devaluation of the franc and other European currencies and we may not, therefore, retain the export advan- tages of virtually a unilateral devaluation of sterling for very much longer.
The Stock Exchange has wisely remained cautious, if not cynical, about the wonderful effects of a 14.3 per cent devaluation on com- pany profits. This is clear from several realistic brokers' reports. Basically, as one broker puts it, a company which sells the same volume of goods at the same foreign currency price will receive 16.7 per cent more sterling, but this extra will be reduced by up to 4 per cent for the rise in raw material costs, by 2 per cent for the abolition of the export tax rebate and by 1.5 per cent for the abolition of the SET subsidy. Of course, these extra costs will vary from industry to industry but the net gain will average around 101 per cent if selling prices remain the same. If selling prices abroad are reduced—which is possible up to 84 per cent, that is, 14.3 per cent less 6 per cent addi- tional costs—sales will obviously increase. The resulting extra profit will largely depend on whether the company sells through its own or- ganisation or through agents. One firm of brokers has calculated that in the former case the export profit will rise by 6 per cent and in the latter case by 4 per cent. In neither case is it going to set the exporting Thames on fire. If these assumptions are fairly correct the utmost effect on some of the big exporting companies would be as follows:
(1) Latest earnings forecast (2) Including estimated gain from devaluation These are typical of the chief beneficiaries from devaluation but we must not forget that
Export Turn- over
Latest Notional Earn- Earn- Divi- ings (1) ings (2) dend Beecham 26% 434% 50% 25%
BSA
55% 22% 28% 14% Gestetner 75% 384% 514% 18%
my
21% 21% 264% 19% Distillers 41% 124% 144% 11% E. China Clay 424% 33% 364% 19%
where the gains in earnings are considerable Mr Jenkins will not allow dividends to be raised. If incomes are to be restricted, so will dividends.
Confronted with this uncertain prospect at home and with an unpromising prospect abroad the more cynical investor may feel inclined to build up a portfolio which is outside the Inc and the jurisdiction of Mr Jenkins. As John Bull must live up to his name and invest at home—with as many devaluation hedges as he can find—the off-side man can look overseas and select an Outsiders Portfolio from the wonderfully variegated security merchandise offered on the London Stock Exchange. If challenged by John Bull he might invest £5,000 today in the following five shares: Royal Dutch, Anglo-American (sA), De Beers, Broken Hill Proprietary and North Broken Hill (all household names with the exception of North Broken Hill, which is included because it holds a wide portfolio of Australian shares) and get on to the share registers of South Africa and Aus- tralia if he wishes to pay a small premium. Of course, these international shares can meet with American selling—prompted by President Johnson—and may see lower prices tomorrow, but who will deny that they provide escape from the clawing hands of Mr Jenkins? I can see quite a movement on the part of British investors to escape abroad if confidence at home remains as shattered as it is today.
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