The investor's conundrum

Nicholas Davenport

WHILE Mr Barber was telling 5,000 company directors at the Albert Hall last week, who were cheering like mad, that the economy was now expanding at the rate of at least 4 per cent to 4/ per cent per annum — a rate twice as fast as the average of the past six years — the Americans were telling the Japanese that if they did not comply with Mr Nixon's demands they would be shut out of the American market. These demands imply that Japan will lose about $5,000 million of American trade and be forced to buy about $675 million of US military equipment. They also imply that the Japanese will be raiding the European market and taking exports away from Great Britain.

It is surely significant that today there is only one British manufacturer of radio sets left in this country; the Japanese are quietly making all the rest for us — and very good and cheap they are. How does Mr Barber expect to retain a growth rate of 4 per cent to 4/ per cent if our export trade is to suffer from the spread of the world trade war? It is all very well for Mr Heath to tell the Tory party conference that "we are standing now on the threshold of a period of growth and prosperity unparalleled since the war," but what if America were to close the door and stop our crossing the threshold?

It is this gnawing doubt which is upsetting the Stock Exchange. Brokers watch feverishly the Wall Street market and every downward plunge gives them the jitters and rightly so because it leaves Throgmorton Street so much dearer on the comparison of price-earnings ratios. Having discussed the Wall Street blues last week I have no wish to add to their nervousness. Indeed, if a professional ' bear ' like the well-known economist ' Calamity ' Janeway sees the Dow Jones index dropping to 500 (now 838) I feel sure that it will not happen. The Japanese are too scared of a world trade recession to resist much longer coming to terms with the Americans. The first approach to a settlement will create a better feeling in both markets.

For the reassurance of the investor I have been making an investigation into three previous bull markets and find that they usually run into trouble after some three to four months. The first was 195860 which lasted for nearly two years and scored a rise of 122 per cent, the second was 1962-64 which went on for two years and three months and scored a gain of only about 50 per cent, and the third was 1966-69, covering the devaluation which soared 83 per cent and lasted two years and two months. The figures in all cases are those of the more volatile thirty-share FT index. The first ran into trouble after about nine months and did not get going again for nearly four months; the second stopped after ten months and took four months to get alight again; the third slowed after nine months and stayed still for three months before assuming its meteoric devaluation boost. The chartists will tell you that each bull market has to have a short period for consolidation after its initial rise. During this period nervous holders sell and stock passes into stronger hands, so that the subsequent rise is all the steeper. In the present case the bull market started on March 3 when the FT index was 305.

The previous bear market had lasted two years and two months and the fall in equity values had been 41 per cent.

What distinguishes this bull market from the other three is the steepness and shortness of its initial rise. It jumped 40 per cent in four months. The index reached 430 on September 9. After such a stupendous rise one might expect the ' consolidation ' phase to last longer than the usual three to four months. Indeed, it is likely to last until America removes its 10 per cent surcharge on imports and

secondly, a return to fixed, if more flexible, exchange parities—with the upvaluations of D-mark and yen to Mr Nixon's satisfaction — removes the risk of a trade war spreading. We may even have to wait well into the New Year before this happens. we may even have to wait until Mr Barber's next April budget to give us the extra reflation at home needed to offset a possible decline in our export trade.

There is another menace which might prolong or upset the so-called 'consolidation' phase. I have referred to the disenchantment of the small investor in America with the mutual funds. Investment in equities not only did not protect him against inflation but involved him in grievous losses where the ' go-go ' managers or the IOS type of crazy management made a hash of things. Is this revulsion against equities affecting also the small investor in Britain? Certainly the unit trusts have had a bad time — the August net sales of only £243,000 picking up to a mere £2.8 million in September. What has been remarkable has been the growing success of property bonds, although property is not really suitable for an open-ended trust and the management has to be like Caesar's wife, above suspicion. It has begun to dawn on the small investor that in an inflationary period his savings are better invested ill property, even if it is only a cottage or a council house, than in equity shares. The Central Statistical Office brought this home to the public last May when it published its latest survey of the nation'a wealth. It revealed that in the decade 1951 to 1966 the greater part of the rise in the national wealth of the UK at market values from £59,000 million to £140,000 million was due to the increase in propertY values. (In personal terms this Wa° equivalent to a 120 per cent rise to £2,500, per head.) About 75 per cent of the total national wealth belonged to the personal sector; about 20 per cent to industrial and

commercial companies. The share of the public sector rose over the ten years frorn

a negative position (i.e. liabilities ex' ceeding assets) to a small positive share due mainly to the increase in the market

value of local authority housing. 1 significant feature was that the physic°, assets of corporations at market prices htw

tended to decline while the physical asset° of persons and local authorities in the shape of land and buildings had tended t° rise. No wonder the property bond caper I5

having such a success.

Rut there must be some suspicion SO

lurking in the minds of small invest0t5 when the inimitable Slater Walker has td advertise "the most significant new Inveat'd ment since property bonds" — the bort., which guarantees your capital "which never fall in value," annual dividenv added to your bond annually which c911, never be reduced in value or taken but can be exchanged for cash free of VI; and capital gains tax, and a life assuralles cover which is guaranteed and is alvv8Yt, Trreater than the value of your investrne°0 Perhaps some disbelieving skunk „ sticking to Treasury 5i per cent 8 !, per cent at 67 to be redeemed at 100 e? 2012 or even War Loan to yield for ev 8.7 per cent.