ECONOMICS AND THE CITY
Defending Throgmorton Street
Nicholas Davenport
Having protested against the nonsense talked about the Stock Exchange in this pre-election silly season I never expected it to turn aP again in the money columns of this paper. Mr Benjamin Holland (The Spectator, last week), claims that there is a widening rift between the City and British industry, that the sensational drop in share prices is evidence of the City's hysteria and that this must bring into question the value of the • Stock Exchange as an institution. I think he is talking through his journalistic hat. I must repeat what I Said — that it is not the City which marks down equity prices hysterically; the City just answeres the telephone and when selling orders Predominate — coming from the far corners of industry round about the country — down go the prices in the capital market. Would Mr Holland like to close the Stock Exchange and deny liquidity to investors? He would lost a lot of circulation if his readers were unable to turn shares into cash When they felt jittery after reading his pronunciamentos.
The truth is that there is a very Close understanding between industry and the Stock Exchange. Industry knows very well that it cannot float issues on the Stock Exchange when (a) the rate of interest is so high that it allows no margin of profit after paying, say, 15 per cent upwards, on a loan stock; (b) when equity shares are selling at such a low multiple of earnings that it would be 'giving' the shares away, and (c) when the increase in dividends is limited by law (lately 5 per cent, now 121/2 per cent). It is not the Stock Exchange which determines the rate of interest but the world central banks struggling against inflation. It is not the Stock Exchange which determines the low equity 'multiPies' but the legal limitation of dividends and the nervous selling of shareholders frightened by the threats to private enterprise mouthed by Tony Benn and his Marxist friends in the trade unions Who want to nationalise the top industrial companies. How else could you account for ICI selling at an estimated price-earnings ratio 3.2 and a dividend yield of 9.6 per cent?
In spite of the current collapse of security prices, which is a common feature of every capital market in the western world, the Stock Exchange continues to perform its vital function of converting the savings of the people, collected by the life and pension funds and the like, into the investment required by the capital spenders. It has even • converted more this year in the first eight months than it did last year in spite of the gloom. Here are the figures from the capital issues record kept by the Midland Bank which I reproduce because Mr Holland's inexact figures gave the wrong impression:
S.E. Capital Issues in £ millions First eight months
1972 1973 1974 E868.7 £243.7 £332.4 Of the £332.4 million raised this year the financial group took only £48 million. The local authorities and public boards took £265 million.
What Mr Holland does not appreciate — and no socialist seems capable of ever understanding it — is that the managers of the institutions who collect the savings would not be prepared to convert them into investment if they were not sure that they could convert them back into cash, or switch one investment for another, in the open capital market created by the Stock Exchange. It is amazing that Throgmorton Street has been able , to provide them with so much cash this year. But enough is enough. I recently suggested that the managers of the savings institutions had overdone their liquidity urges and that they shoiild now agree among themselves to come in and support the market with buying orders up to £5 million a week whenever there is panicky selling and the FT 30 index falls below 200. It is good to read that the deputy investment manager of the Prudential is now a net buyer of equities. I hope the others will follow his lead.
Mr Benjamin Holland should welcome my suggestions as he appears to regard the savings institutions as craven investors. But what exactly he means when, he says that "the institutional investor is gradually squeezing out the small saver . . and diverting the small man from direct intervention in the market" passes my comprehension. The Stock Exchange Survey of 1966 on 'How does Britain Save?' gave an estimate of 2'./2 million direct owners of Stock Exchange securities which appears to have risen now to 3 millions, About 85 per cent of all households save through life assurance or pension contributions whose funds flow into bonds, loans, properties and equities. There is nothing to prevent the private individual investors becoming five million if they can save enough to become shareholders. According to the Inland Revenue statistics for 1973 the 3 million individual shareholders accounted for 28 per cent of the then market capitalisation of UK equities, which is not much short of the 30 per cent institutional holding mentioned by Mr Holland. Unfortunately inflation is now eroding savings and there is small chance of the 3 million individual shareholders becoming 5 million. Incidentally of the 3 million at present 1,100,000 own less than 61,000 worth of securities.
It is heartening to see that the Prime Minister is now a supporter of the Stock Exchange. In his speech to the TUC at Brighton, he said: "The Labour Government wants to see industry prosperous and this means a stock market strong and confident enough to help industry raise the finance required for the industrial investment and capacity so urgently needed and so long lacking." The stock market will certainly oblige when the industrialists regain their own confidence but this at the moment is lacking first because of Mr Wedgwood Benn and his nationalising crew, and secondly because some labour unions are not willing to use the new machinery installed, as some dockers have demonstrated.
A 'further point, which the Deputy Chairman of the Stock Exchange, Mr Dundas Hamilton, recently made in his letter to the Times of September 12. Investors will subscribe even to equity issues when they are allowed a decent increase in dividend income (now raised to 121/2 per cent). Between 1971 and 1973 total dividend payments rose by 5 per cent, while wages and salaries increased by 27 per cent. The various measures taken by Labour Chancellors to encourage retention of profits has not led to any marked increase in fixed capital formation.
It is obvious that a social compact between trade unions and the Labour Party is not enough. We want a social .compact between trade unions and industry. Perhaps we are getting near to this if the national opinion polls for Aims of Industry are correct — namely that 72 per cent of workers in private industry reject nationalisation and only 12 per cent definitely want it.
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