Not as black as all that
Nicholas Davenport
The nervous holders of equity Shares and government bonds reacted badly to the Queen's Speech although it was couched in the mildest and most boring of Official terms. With such a headline in the Financial Times as "Major Programme of nationalisation" I suppose a few frightened shareholders telephoned their brokers before they stopped to think. What else could you expect Mr Wilson to do. in the speech but conform strictly to the terms of his election manifesto on which /the "social compact" was dreamed up? The taking-over "with fair compensation" of the ship-building, ship repairing and aircraft industries is certainly not "a major programme Of nationalisation." The Bill might not even be ready before the next session of Parliament.
• Nationalisation usually brings a lot of extra business to the Stock Exchange but on this occasion the sums likely to be Involved are not large. That ship repairers should. be taken over is, of course, a load ot nonsense. Ship repairing jobs should not be a state function; they fall naturally into the field . of private enterprise. The ship-building activities of Austin and Ptckersgill and Vosper are profitable and well managed and I suspect that the workers would much Prefer to remain under private enterprise. Austin and Pickersgill are a subsidiary of London and Overseas Freighters which spent °NY £3 million in buying out the outstanding 40 per cent equity stake in 1970. The present value of A•and P is said to• be around E20 million, so it is not surprising that LOF shares should have risen by over a third since the low point of the FT index in September. Westland is another share whose value Fould benefit from take-over at fair compensation." When it Comes to Harland and Woolf, which !s the key to the economic prosperfly of a whole province, the state 8,hould, of course, take over but this 'Lissy, doctrinaire fiddling with Profitable small companies or with the subsidiaries in aircraft and ship-building of large well managed ce. Mpanies like Vickers, Hawker .Siddeley, GEC and the Laird Group, 1,s largely a waste of time and effort. 1.,t Will merely raise our manufacturing costs through the multiplication of the state bureaucracy.
„ What investors should realise. is mat this socialist Government With
its tiny overall majority of three is not capable of undertaking the
wholesale nationalisation of British
industry. With a non-socialist vote of around 60 per cent it has not
even got a mandate 'to do it. As for the talk of nationalising North Sea oil with 51 per cent State participation in the operating oil companies Mr Wilson disclosed in. the debate on the Queen's Speech that he had wisely asked Mr Lever, the Paymaster General, to advise him on this complicated issue which could involve the Government in a capital commitment of over E4,000 million.
If the Government were to take over 51 per cent of the operating oil companies it commits itself, as the White Paper said, to its full share of the development costs, including past costs. With a deficit on the balance of payments this year of around £4,000 million, and with a borrowing requirement for 1974-75 up to over £4,000 million as well, no sane government would contemplate the cost of "nationalising" North Sea oil. Indeed, the alert Mr Lever would probably be trying to induce the foreign oil companies to pump in more money to ease the appalling strain on the balance of payments. There are other ways of , securing for the nation the full cash benefit of North Sea oil, such as setting up a state company to buy all the oil produced, but the extravaganza of 51 per cent nationalisation must be given up until Britain is once again able to pay its way in the world which will not be for some years.
It is the feeling that the Government is proposing to throw money about like a drunken sailor — forking out billions on nationalisation when it is in effect, bust—which is responsible for the present demoralisation in the gilt-edged 'market. We have new got up to yields of over 17 per cent in the long end of the list. The market is not only shocked by the irresponsibilities of the fanatical nationalisers but is gravely worried by the prospect Of increasing cost-inflation, by the reflationary budget to come from Mr Healey and by the increase in the borrowing requirement which this may entail.
The CBI is asking for £3,000 million to restore the liquidity and profitability of industry. Now Mr Healey can remove the advance • payments from corporation tax but whether he could reduce corporation tax from 52 per cent to 35 per cent, as the CBI want, without getting a revolt from his left-wing nationalisers is extremely doubtful. There is the more subtle question of not claiming the immediate payment of tax, on the profits which arise under conventional accounting from stock appreciation through inflation (one 'lot of experts argue that such profits are not taxable and another lot that they are). I would have thought that Mr Healey could legitimately forego the increase in revenue from inflationary fiscal drag but I would not expect him to hand out largesse to private industry which his Marxist lunatic fringe want him to expropriate. The essential thing is first to restore profitability to the private sector by removing the too strict price controls and secondly to restore company liquidity by helping Mr Lever re-cycle money from "the street" into the cash-starved profit-worthy companies. This operation may perhaps require giving a government guarantee for -exchanging short-term money into longer-term industrial loans, but the important thing is to do the operation without setting up an "investment bank" and creating thousands of bureaucratic jobs. I firmly believe that the operation can be done through existing bank channels and that the result could be that the banks will have funds released for investment in the short end of the gilt-edged market. Could it be that the gilt-edged market is overdoing its fright? Could it mean that the short end of the market is a "buy"? ,
Whatever the precise outcome of the November budget may be I expect that the stock markets will recover their equilibrium when they see the "worst". In any event stockbrokers are likely to see much more activity and begin to cover their costs, which is something that cannot yet be said of most industrial companies which adopt strict inflation accounting.
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