In the City
The equity future
Nicholas Davenport
By those listening to the roar and thunder of Britain's 'approaching economic Niagara' the still small voice of economic truth is not likely to be heard. But it is good to know that it is at last being heard and regarded by statesmen responsible for the economies of the capitalist world and for what remains of the international monetary system. According to press reports and rumours they have responded to Mr Callaghan's cri de coeur on his Panorama interview. They are prepared, as soon as our IMF loan application has been approved, to work out with the UK the stabilisation or conversion—in whole or in part of the £6,300 million sterling balances presently held by foreign central and commercial banks. While such huge sums are being made the sport of nervous or speculative dealers in the money exchange markets they have at last realised that not only is the recovery of Britain held up— through preposterously dear money— but the world recovery as well. The world may not owe us a living but the statesmen responsible for the economic health of the capitalist world have realised that it is in their own interests to help one of its important members stabilise its exchange rate.
These sterling balances are a complicated question the discussion of which I must reserve for a later time--thankful that it is now realised that they are not all due to spendthrift socialist governments—but for the moment I. must fulfil my promise to bring what comfort I can to the holders of equity shares who have seen thousands of millions wiped off the market value of their portfolios as the pound has been plunging in the exchange markets. At the end of 1975 the market value of all the equity shares quoted on the Stock Exchange was around £214,000 million and in ten months the value has dropped by over £50,000 million. This has brought despair to many families of the upper middle class who had been educated falsely to believe that equity shares were a hedge against inflation and a hoard of increasing value. They have now realised their mistake. The official statistics reveal that families have been disposing of their Stock Exchange investments at the rate of between £1,000 million and £2,000 million a year. The Diamond Commission on the distribution of wealth has reported that the proportion of equity shares held by individuals had dropped in the decade to 1973 from around 70 per cent to 50 per cent while the holdings of life and pension funds and unit trusts had risen from 21 per cent to over 36 per cent. They must now be nearer 50 per cent.
There is no denying that the equity share has lost--perhaps for all time—its glamour status. Jim Slater with the `go-go' managers of his time tarnished its image with their speculation and losses but the worst damage was done by Bernie Cornfeld who sent his salesmen knocking on the door of middleclass homes selling his fabulous Dover Plan. They produced statistics purporting to show that if you had invested in the equity portfolio of the Dover Plan you would double your money every ten years, and being philanthropists, and not cheats, at heart they would actually lend you the money to make your first investment. The Securities Exchange Commission in the US never allowed Cornfeld's slick salesmen to operate in their country but the collapse of the *go-go' mutual funds (unit trusts) in America drove the private investor out of the market. With one notable exception the unit trusts in the UK have been honestly managed and that goes also for the unit trusts of the Slater group--but they have not been able to convince the private investor that backing equity shares is any less risky than backing horses.
In fact, the equity markets in recent years have shown increasing volatility. In the 'fifties the two great bull markets lasted three years and two years respectively. In the 'sixties the bear markets were extremely short and never registered falls of over 33A per cent. But thereafter volatility set in. Wilson's last bear market lasted over two years and dropped 41 per cent. Heath's bull market scored 80 per cent in fourteen months. I have described the collapse in the index from 545 (May 1972) to 147 (end-1974) as an extreme panic due to the City's belief that the new socialist government intended to bring the mixed economy and its private enterprise to an end. The recovery from 147 to 420 was simply the correction of abnormal fears, Mr Healey having demonstrated in his budgets that the City's worst fears were groundless. This recovery was not a bull market. But now we have had a second panic due to the collapse of the pound and the wild talk of our impending bankruptcY. So we are once again engulfed, as the charts show, in a bear market. As I write the index is below 270.
I have previously explained that in order to have a bull market we must have a conjuncture of favourable economics and favourable politics. I do not believe that this is so remote or impossible as most people imagine. The world recession (now faltering) should be nearing its end next year. It has been held up by the monetarY checks imposed upon inflation but if the funding of the sterling balances can be carried out we can at last look forward to cheaper money in the UK. The CBI keep a chart showing the percentage of their members reporting that sales are limited by lack of orders. There is a surprising regular frequency of four and a half years between the slumps, and the chart points to end-1976 as the bottom of the slump. As sales are als° limited by failures to deliver, which can only be corrected when the unions become more co-operative about productivity, I suspect the chart is over-optimistic and that 1977 is more likely to be the bottom of the slumP. But it is worth noting that sales are not limited by lack of orders on the export front —only on the domestic front where delivery failures (e.g. in motors) have switched the buyers to imports.
As regards politics, it is almost impossible, as I have said, to have the favourable conjuncture while a socialist government is In power, but Mr Callaghan's is an immense improvement on the Wilson administration. With the solid backing of the trade unions, which he enjoys, he can ignore the lunatic proposals of his left wing. He has alreadY said that he intends to cut government spending by 'slices' each year. He has already proclaimed at his party conference his economic orthodoxy. He told them that they can no longer spend their way out of a recession and increase employment bY cutting taxes and increasing government spending. 'That option,' he said, 'no longer exists.' His sanity and soundness are 3 guarantee that the IMF' loan will be forthcoming and that the 'group of ten' and the EEC will come to our help in the difficult problem of funding the sterling balances_,. So, when you find the shares of the Fie index offering an average dividend yield 01 8 per cent and selling on a price-earrings. ratio of only 6, when you can pick Out shares of well-managed companies enjoYiag, better labour relations selling at halfht ell net asset values, I think you would be verri foolish to get rid of them. But it reallY a depends on whether you believe in the survival of Mr Callaghan who has Pr° claimed his determination to improve the profitability of manufacturing industry.
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