Investment fashion
Nicholas Davenport
Fashion in the investment world changes almost as quickly as it does in the King's Road, Chelsea. At the beginning of the year every broker had a long face and could see nothing but ruin ahead. The Oovernment had made every possible mistake and had brought on itself a battle with the entire trade union movement which could only end in a general strike or a general election which it would lose. With this onrush of pessimism the FT thirty ' index, which had touched 505 at the beginning. of the year, came tumbling down to 426 in March and looked like collapsing to 400 or below.
But gradually the political atmosphere changed. Mr Heath showed no sign of repeating Mr Wilson's technique of inviting the militants to No 10 and giving way to them over beer and sandwiches. The statutory Phase 2 of his counter-inflation Act — allowing only E1 plus 4 per cent in pay rises — was to stand as firm as the law of the Medes and Persians. And instead of his confrontation with labour working itself up into a general strike, the trade unions abandoned their militant action. Finally the miners voted by more than two to one against a national strike and the hospital workers are calling off their strike. Immediately the investment fashion changed. As Mr Heath now seems certain to run his full term it • is considered safe to invest in the 'blue chip' equities whose profits will rise on the tide of a 5 per cent growth rate. Further, the Government has relaxed the rules on prices and profits. Companies are in effect allowed to keep the extra profits from increased turnover and the CBI has .been assured that the Treasury appreciates the need for profits adequate to finance new investment. So the FT thirty index has bounced up from 426 to 465.
Of course, investment fashion will change again at the flick of a bad statistic. The index of con sumer expenditure will before long slow down its growth rate, for there is no doubt that spend ing was temporarily accelerated in anticipation of VAT. Engineer ing orders have been rising so strongly that reports of a shortage of skilled workers in certain in dustries have already begun to circulate. So the nervous investor will before long begin to get wor ried about the over-heating of the economy and fear that the next Chancellor — there is a rumour that Mr Barber will leave the Treasury on the passing of the Finance Bill — will begin to apply the brakes. And although the labour movement has for the time dropped its militancy, how do we know that it is not just retiring from the field of battle in order to renew the fight on a better occasion? How does any one know that Mr Heath will be able to secure a consensus for the operation of Phase 3 and keep economic growth running at 5 per cent?
These chops and changes in investment fashion are disguising the underlying basic trend of the market, which is downward. It began not in May 1972, as Skinflint suggested, but in August 1972, after the bull market had made its 'double top.' Then it dropped seventy points, recovered fifty, dropped eighty, recovered nearly forty and on the next drop will probably fall to about 410. This curiously enough will be near the conventional bottom of a bear market. In previous bear markets, when company profits have fallen, the average priceearnings ratio for industrial shares has fallen to 12, which is equivalent to 13 on the new 'imputation 'system of company taxation. Now it is estimated that company profits which have been growing at around 12 per cent a year will drop to a growth rate of around 8 per cent a year under Phase 2 and 3. On the assumption that the average price-earnings ratio will fall to 13 this will bring the index down to 410. Of course, if the miracle happens. if Mr Heath avoids a confrontation, and wins a consensus for Phase 3, if the 5 per cent growth rate for the economy is held, the bear market will stop before 410 is reached, but it is a big ' if.'
These changes in investment fashion are nothing like as startling as the revolution which has swept over Wall Street. The private investor has turned against the professionals managing the mutual funds (unit trusts) and is taking his money out of the Stock Exchange as fast as he can. Last year he withdrew from the mutual funds no less than $1,600 million and put the cash into savings and loans associations which are the American equivalent of our building societies. He is still withdrawing funds this year, as may be inferred from the fall in the Dow Jones index from the magic 1000 to 922 (now 960).
What has caused this remarkable change in investment fashion? I believe that the small investor has never forgiven the ' go-go' managers who took him for a ride in the great 1968 boom and left him cleaned out in the subsequent 1969 slump. The collapse of the great IOS mutual fund, although it did not involve Wall Street, for the SEC did not allow Bernie Corfeld to operate in America, was a warning to the small investor not to trust professional ' go-go ' managers. The losses incurred by the small man in the disintegration of the recklessly managed mutual funds exceeded the disaster of the great Wall Street slump of 1929/30.
Now in this enlightened spring of 1973 the collosal Equity Funding Life Insurance fraud has come to remind the small investor that the share markets are still unsafe. Many years ago an ex-rag and bone merchant formed a company to sell insurance and mutual funds issued by other companies and went on to take over four insurance companies and a mutual fund management. It prospered and the shares soared. Then in 1968 the small investors, poorer but wiser, took their money out of its mutual funds and the management — in order to maintain its cash flow — thought of the brilliant idea of re-selling — reinsuring — non-existent life policies. The company's computer even killed off the non-existent policy holders to throw up a realistic death ratio. Even large and old-established insurance companies and banks — the reinsurers — were taken in. There has never been such an impudent and collosal swindle — running into over $1,000 million. Such a fraud, comments the Economist, is technically possible in Britain in spite, of the new powers of the DTI.
The small investor in America must now be so scared of being swindled by ' go-go ' managers that he has decided to get out of the stock markets and stay in savings bonds on which at long last he gets a decent rate of interest. For him the cult of the equity is a fake cult — so sharply has investment fashion changed. Let us hope that this share-phobia does not spread to these islands. If it does, God help our unit trusts.
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