In the city
Against investing abroad
Nicholas Davenport
The fact that the fourth estate of the realm has agreed to share responsibility with Parliament for maintaining our economic balance, that is our anti-inflation stance, for another year—I refer, of course, to Mr Healey's 4f per cent deal with the TUC_ should have rejoiced the heart of every bull on the Stock Exchange, but it was not to be. The share market seems to have taken its cue from the exchange market where sterling continties to wobble. So investors are still worried to death by sterling. There still seem to be many willing to pay the absurd premium price to get out. I am not thinking of the premium-stripping racket, which is Presently engaging the attention of the Fraud Squad and the Bank of England, but of all those portfolio investors who very Properly go all out for earnings and divi44end growth but seek it abroad rather than ifl the UK because of the protection it may give against sterling depreciation. The Government, one must admit, does !ts best or worst to discourage portfolio Investment abroad. To buy foreign securities you have, first of all, to buy investment currency at a premium in the so-called dollar investment pool', or to raise a foreign currency loan. Either involves great risk. The too-too-clever investment trusts or Insurance companies who raised dollar loans in 1974-75 and were caught by the fall in Wall Street had to buy extra investment dollars at high premiums to make up the short-fall in the collateral for their original loan. They are only now just emerging from this disaster as Wall Street has lately touched its 1000 index high again. But how much better it would have been if they had not been so bearish of sterling, if they had not rushed into the London market to raise capital for investment abroad, if they had waited for the FT equity index to fall to 146 at the end of 1974 and then gone bulls of British industrial shares. By now they would have enjoyed a profit of nearly 200 per cent. Since the beginning of 1975 the British industrial share market has, in fact, outperformed nearly all the foreign bourses. To come back to the investment dollar Pool, this was formed in 1947 when the Labour Government wapted to deter port101!o investment abroad by restricting the daily supply of investment dollars to the mount realised by sales. As the demand was in excess of the supply a premium was established and this ran as high as 120 per ce, rit 'nominally' when demand was particuhiarty strong at the beginning of the year. I ave to say 'nominally' because the market calculates the premium on the Smithsonian x9c..hange rate of 82.60 fixed in December I. As sterling has dropped sharply since
then, the 'effective' premium rate is now 58 per cent based on $1.8065. (I leave the mathematically-minded to work out the exact sum.) To make investment overseas still more risky the Government has a rule that only 75 per cent of the proceeds of sales can be reconverted through the premium market; 25 per cent has to be reconverted at the official exchange rate, so that the investor loses a quarter of the high premium. This is a ridiculous rule, for it puts a penalty on good portfolio management. If the manager wants to switch out of a bad security into a better one he has to suffer the pehalty of losing 25 per cent of the premium. I have written in vain to the authorities on more than one occasion pointing out 'that (a) it would make better sense, if the premium has to stick, to make it payable on the purchase of the foreign security and not on the sale and (b) that the surrender of 25 per cent should not apply if one foreign security is exchanged for another for mere investment protection or improvement. But the authorities will not listen because the Treasury claims that it makes up to $250 million or more for the credit of the balance of payments each year by its 25 per cent premium grab. It would be better to impose a small tax on overseas portfolios than penalise good management in this stupid way.
Heaven knows that the management of their large overseas portfolios by the investment trusts and insurance companies leaves much to be desired. It was noted that the board of one great Trust was bitterly attacked by a disgruntled shareholder at a recent general meeting and that Mr Jo Grimond—of all people—was moved to write a letter to the Financial Times complaining of the disappointing market behaviour of investment trust shares, which are selling at an average discount of 30 per cent on their net underlying assets. (One small trust selling at an estimated 60 per cent discount may be pushed into liquidation.) The index of fifty investment trust shares fell from-184i in January to 155 in April (when the discount was over 40 per cent) and has only recovered now to 168. There is said to have been heavy institutional selling of Investment trust shares which have apparently gone out of fashion. Certainly they are out of fashion in our new socialist society. Mr Jack Jones and his union colleagues can see no point in portfolio investment abroad and would sell the lot if it would help sterling in its present crisis.
In point of fact this would not help sterling at all. The foreigners who hold sterling like to think that we are a rich country whose long-term assets abroad are greatly in excess of our short-term liabilities, which they are. At the end of 1975 the overseas shares of the invest. ant trusts alone were valued at £2,100 million, more than half being in the US. Forced liquidation of these portfolio assets would knock the market flat and necessitate selling a large number of good shares at a loss. And the so-called dollar premium would disappear. This premium has brought extra taxable wealth to British residents (which accounts for the illicit premium 'grab' which is under investigation). For the education of Mr Jack Jones and Co I would add that a thriving London market in foreign securities— which received a boost four years ago when the 'dollar' premium was attached to shares in the former 'overseas sterling area'— brings more taxable commissions to London brokers and raises the level of the 'invisible' overseas earnings of the City of London.
My advice to investors—and I did not take my cue from Jack Jones—is to stop whoring after exotic foreign equities and start having more confidence in British economic growth and sterling. Of course, sterling is a vulnerable currency. Having once been a reserve currency—monetary authorities abroad still hold over £4000 million and private sources perhaps another £3000 million—it has to meet continual selling.from one reserve side or another but the big foreign holders are not fools. They know that if they all tried to sell at once there would be no price left, just as there would be no price for gold if all the monetary authorities wanted to unload their gold stocks at pnce. In the money market fashions change as they do in most markets. At the moment it is the fashion to pump money into the Swiss franc which has appreciated 52 per cent against the dollar since the Smithsonian fixing. The Swiss franc is now overvalued—much to the discomfort of the Swiss economy—just as sterling is undervalued—much to the advantage of the British economy. Investors who do not see this point and are still willing to pay a high premium to get out of British shares (although many of them, especially the resident mining companies, have valuable assets overseas) must be yery blind. The economic sums which Mr Healey has been working out with the TUC must redound to the benefit of company profits. Just look at [Cl.
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