THE INVESTMENT CYCLE

By NICHOLAS DAVENPORT IF Mr. Heathcoat Amory really wanted to start a war of nerves in oie business world it seems to me that he has been brilliantly successful. The banks have al- ready told their managers to get tough with borrowers, the board- room men are having a critical look at their capital programmes, and the 'bull' market on the Stock Exchange has been brought to

4 full stop. If bank advances are up again on April it 120, when the monthly figures are published. IS

, Special that the Chancellor will bring in pecial deposits' scheme, which will have the to

effect of reducing the ratio of their liquid assets deposits , posits below the conventional 30 per cent. tat present 311 per cent.). This will force the banks t° call in advances or sell more gilt-edged securi- ties --Perhaps at a loss. As a further slump in the gilt-e4

1ged market, putting the borrowing rate up

lor industrialists and local authorities alike, wemld have inflationary complications—through rise in rents and other costs—I hope that the dirl'reasury will be sensible enough to give positive • ections to the banks to cut advances, begin- 1.16 with advances to the hire-purchase finance tfi"'Panics. But the monetary world is so crazy

s.

hut ^tnything could happen. Even a 6 per cent. 041,1,

" rate,

To investors who enjoyed a steady rise of 120 Per cent, in their equity share holdings in the two Years to January, 1960, this is exasperating "MIA, but I hope they are beginning to realise that they must expect cyclical fluctuations as long monetary policies and techniques remain as haphazard and experimental as they are today. It has long been my investment thesis that while the new universal aim of economic thexPansion and full employment has flattened out e „,, ul LI deep trade cycles, it has set up new cyclical niovements through the alternations of govern- nient Atter reflationary and disinflationary policies, the reflation efforts of 1958-59—the ending !If the bank squeeze, the freeing of hire purchase cid of capital issues, the budgetary reliefs, etc.— co _

Me the disinflationary efforts of 1960—dearer

,nerteY, the 'special deposits,' the hire-purchase 'esraf th te etc., all because the present masters at , treasury are obsessed by the idea of Tory kre,i, which means that you must never Pose controls until it is too late. The cyclical 'lletuations which these efforts set up in the m ,i3eeuritY markets are quite considerable, if not as evastating as in the 1920s and 1930s. he institutional investor seems to me to be ugelY slow in accepting this pretty obvious „ "'anent thesis. At an investment conference gantsed by the Institute of Directors on April 7 :nder the guidance of Mr. S. P. Chambers, the ,11eWchairman of ICI, Mr. W. F. Andrews, tue investment manager of Unilever, laid down ker tertain rules for the use of pension funds which

ne

'd to ignore the new type of cyclical move- in security values. He was attacking the Wide, t 1Y held view that equity shares were a 'must' &or

Pension funds because they represent 'real' valu

the ,es and provide protection against a fall in `Atte of money. (Some pension funds invest

exclusively in equities.) To me,' he said, 'an equity yielding 24 per cent. to 3 per cent. and showing an earnings yield of, say, 5 per cent. to 54 per cent, is too dear whatever the industry or company.' But this ignores cyclical relativity. The statement is obviously true today at the begin- ning of the disinflationary cycle, but it would have been untrue at the beginning of the reflation- ary cycle. For example, at the beginning of 1958, after two years of disinflation, an equity if it could be bought to yield 24 per cent. to 3 per cent, on dividends or 54 per cent. on earnings would have been cheap, for the recovery in profits and divi- dends in the next two years of reflation could easily have been from 50 per cent. to 100 per cent.

Of course, if Mr. Andrews is'merely intending to call the attention of pension fund managers to the point on the investment cycle when it becomes profitable to switch from equity shares to gilt-edged, then he is doing a great service to the investment profession. Yields of 6 per cent. can now be obtained from good fixed-interest stocks and if the increase in equity dividends over the next few years is only going to be of a modest order, it will pay the pension fund well in gross income to buy the fixed-interest stock. War Loan, as Mr. Andrews said, is the ideal pension fund stock on a high yield basis, being a 'perpetual,' but before switching into it the pension fund manager must make sure that the Government has reached the peak of its dear money policy. This is not yet clear. But War Loan must be getting near a purchase at 624, to yield 5.7 per cent., for the lowest it has ever touched was 60.4 11 September, 1957.

I hope that Mr. Andrews will prevail upon his pension fund colleagues to adopt a more active investment policy than the manager of the ordinary life fund. The growth of a life fund can be so rapid that theananagers are concerned only as to whether new money should be diverted into fixed interest or into equity shares. Switching existing holdings is not so important. But pension funds are more sensitive to changes in potential gross income and if their managers follow Mr. Andrews's advice and start switching from exist- ing equity holdings to War Loan, while the mana- gers of the life funds turn their new money into fixed-interest investment only, there can be, quite a sizeable reaction in the equity share markets. This would be accentuated if private investors decide to keep their powder dry for the target of the heavy new issues which are forecast over the next few months. Let us hope that the Treasury will make up its mind quickly and not wait until a balance of payments crisis in the autumn forces its hand.