MONEY
A pause in the Bull market
Nicholas Davenport
Equity shares had a nasty setback last week. The FT index was over 20 points down. In spite of its current recovery I still think that this bull market has gone up too fast, having risen by about 40 per cent from its low point on March 3. Its exuberance was understandable because that rare conjuncture had occurred — a favourable political and a favourable economic climate. The return of a Tory government pledged to help the equity of private enterprise was 'the first 'bull ' signal; the second was the overdue reversal of economic policy — from deflation to a reflation of over £1,000 million. The only disappointment was that the reflation medicine was not strong enough — the recession having taken root too deeply — and was not accompanied by cheap enough money. Bank rate was reduced only to 5 per cent and was accompanied by a so-called revolution in banking policy which suggested that the authorities did not really believe in cheaper money as the economic spur. Let us now pause to consider how external events could possibly bring the bull market down a further step. After a sharp rise like 40 per cent it is not uncommon to lose about a quarter or a third of it.
Politics is the obvious threat. The dreary Labour 'conference this week will be followed by a dreary Tory conference next week. The first has voted against and the second will vote for entry into the European Common Market. As for Labour we may see a distinguished Parliamentarian forced to resign his position as Deputy Leader because he is honest enough to stand by the convictions he has expressed over a decade. We may also see the only Labour politician who understands the money system and how to make a mixed economy flourish — Mr Harold Lever — thrown out of the shadow cabinet. But whether the death-wishes of the Labour party 411 help to restore the bull market on the Stock Exchange is very doubtful.
A more decisive vote will be on October 28, when the House of Commons declares that we will or will not be a firm applicant for the EEC. Everyone in the City believes that the vote wil be favourable but it will have to be followed by a hundred-clause Bill for the Treaty of Rome. Will there be an influx of foreign capital into Britain to provide the investment to absorb our huge army of unemployed? As no other country ,n Europe has such a large surplus of labour — much of it highly skilled as well — the expected revival of industrial investment could reactivate the bull market in a big way. There seems to me only one possibility which could hold up that • desirable denouement. If the Mikardos Joneses and the Scanlons and other Marxists scream loud enough to frighten away the foreign capital which would otherwise come here to employ our surplus labour our economic revival will be delayed. But their Marxist bark is usually worse than their bite.
So much for the immediate adverse political influence on the market in equities. But there is a longer influence which is much more serious. That is the settlement of the great international currency-trade war. As I feared, the IMF conference ended in talk without a settlement. Some of the talk was certainly hopeful, and in the end something like Mr Barber's scheme for a new issue of
SDRs. may come about, but no agreement was reached on the scale of currency up-valuations which would satisfy the Americans. The Japanese import restrictions and the common agriculture policy of the EEC are regarded by the Americans as obstacles to free world trade. It may be that another round of world trade talks, as the Japanese have hinted, will be necessary. It must never be forgotten that the great slump of the 'thirties arose out of a breakdown of the international money system, and the growth of national and regional economic autarchies. And out of the mass unemployment rose fascism.
One hopes that the world has learned its lesson but I cannot say that the Washington speech of Mr Rob rt McNamara, the head of the World Bank, was particularly reassuring on that point. Certainly the World Bank group is living up to its money target, which was to lend double, that is $12,000 million, in the five years 1969 to 1973, but the world's population, in spite of the malnutrition which makes for high mortality among children, is increasing at a faster rate than it can be employed. For example, he mentioned that the Indian labour force would grow by more than fifty million in the next ten years — equivalent to the combined labour force of Great Britain and Western Germany! Unemployment, making allowance for under-employment, is already at about 20 per cent to 25 per cent in the developing countries. What the world urgently needs is, of course, enforced family planning.
In Mr McNamara's opinion most of the developing countries made a wrong choice in relying on their domestic markets for expansion instead of going out for foreign markets. Those which made a drive for exports were more successful in job creation than those who relied on import substitution. But the advanced countries, he added, must treat the exports of the developing countries more fairly, reduce their tariffs and enlarge their quotas. What the western capitalist countries should realize is that a world trade depression is on their doorstep. There has been an appalling slump in metal and some commodity prices; Australia is badly feeling the pinch; South Africa is running into a serious economic crisis; America, the key to the world's recovery, feels desperate enough to fall back for the time being on rank protectionism and run the risk of activating a world recession.
All this that the bull market in equity shares should have a pause if not a setback. The unit trust movement is suffering badly from the lack of public interest in equities. (They seem to prefer 'property bonds' at the moment.) The net sales of unit trusts in August were less than £250,000. Two years ago the corresponding figure was £104 million and the annual total £155 million. The unit trusts have themselves largely to blame by overdoing their advertising claims but the lack of public buying — together with that of the big investment institutions — may point to the general fear that if the great trading powers do not quickly come to their senses they will have a slump on their hands.
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