THE BUDGET AND EQUITY SHARES
By NICHOLAS DAVENPORT
MR. AMORY'S Budget has Under- written the bull market in British industrial equity shares. For this we must all be thankful. It is far better for a Stock Exchange movement to be soundly based on reasonable economic prospects than to be spurred on by un- reasonable fears of inflation or distaste for bonds. Inflation, so, the Chancellor told the House of Commons, had been eliminated from the economy. That became clear last year, he added, when unemployment rose and the decline in exports and stock-building brought about a fall in the level of industrial production and a smaller fall in total output. In the last quarter of 1958 both the index of industrial output and total output began to re-expand, helped by the removal of hire-purchase restrictions, and this upwards trend, said Mr. Amory, was likely to con7 tinue over the coming months. It would not be rapid, because the effect of the decontrol of hire purchase is wearing off, and the rise in output would turn out to be greater than the rise in employment. This would be the natural conse- quence of the high rate of investment in recent years. In other words, productivity would improve, profit margins widen and industrial profits expand.
This is a sound enough base for a bull market in industrial equities.
The only question which remains is whether it has gone too far for the time being or how much farther it is likely to go before it is checked. The bull market began in February, 1958, when the Financial Times index of industrial shares was 154+. All lingering doubts about its validity were removed when Bank rate was cut from its emer- gency level of 7 per cent. to 6 per cent, on March 20. That was the signal for the cyclical investor to help himself to equities. The index thereafter had a pretty strong run up to 225+ by the end of the year—a rise of 46 per cent. After four weeks or so of reaction down to 212.8 the index began to climb again rather hesitantly in anticipation of a favourable Budget, and at the time of writing has reached 225. The average yield on industrial equities is now 5.19 per cent. against a yield of 4.83 per cent. on old Consols. A margin of 0.36 per cent. between the two may be historically slender, but the expected increase in the supply of bank money this year should allow the long-term rate of interest to fall slightly while the expected increase in industrial profits should enable com- pany dividends to rise further. In any case, the conventional spread between the yield on gilt- edged stocks and that on industrial equities is certain to narrow as the investment institutions
enlarge their holdings of ordinary shares.
If the bull market is not yet at an unreasonably high level in this country it is, however, bound to be affected in the near future by the prospect of a general election. Assuming that there is no early announcement, the expectation of a late autumn election would probably begin to affect the market in another three months' time. It is strange that July was the month when the market reached its top in 1957 and again in 1955. (The Stock Exchange still seems to be in the grip of a cyclical pattern of movement which the profes- sional investor prefers to ignore because he does not understand its significance.) It is possible that July, 1959, will again mark the periodic peak of a bull market's enthusiasm. In any case, the an- nouncement of the election date will certainly cause the market to fall.
Apart from the shock of a general election in this country there is also the possibility of a check from the other side of the Atlantic. The Wall Street bull market has been strong since Novem- ber, 1957, and last year the Dow Jones index rose about 35 per cent. Lately there has been an out- break of wild speculation in the low-priced equities of electronic and missile companies, trading in which accounted last week for no less than a third of the total turnover on the Stock Exchange. These low-priced stocks practically doubled in value last year and this year have climbed another 20 per cent., while the Dow Jones index has only gone up a further 5 per cent. I gave instances the other week of two missile equities selling at seventy times their 1958 earnings! Warnings have been issued from responsible quarters and the Federal Reserve has asked member banks to con- tract loans against securities, but while customers can obtain 'no purpose' loans from their local banks and foreign moneylenders can accommo- date at exorbitant rates those who are denied ordi- nary loans, it is difficult to see how stock market gambling can be stopped. One firm of brokers has wisely raised its margin requirements against stocks which are three times or more above their 1958 lows. The Securities Exchange Commission has stated that there is evidence of increasing manipulation of stock prices and has charged some operators with dishonest dealings. It is all very reminiscent of 1929 and Americans might re- member that it was the crash in London of a dis- honest speculator and manipulator which caused the bull market at that time to collapse. What frightened me this week was the report from the Economist's New York correspondent to the effect that stock salesmen were pouring into Wall Street at a rate of over 3,000 a month. Here is clear evidence that stock market gambling is running wild and that Wall Street is heading for trouble.
Gambling apart, I am amazed at the apparent over-confidence expressed by ordinarily conserva- tive American brokers who think nothing of pro- jecting the earnings of their favoured companies two or three years ahead. It does not occur to them that theirs is not a particularly stable economy and that it needs more than a high population growth to keep the bull market going when equities yield only 2 per cent. and bonds 4 per cent. or more. In any case, a depreciating dollar is not a firm base for a bull movement. The wise professional manager of British funds will be pulling in capital from dollar equities and not adding to sterling equities. Some time—but perhaps not before the late sum- mer or autumn—Wall Street will have a sharp set- back and as Americans have been buying not a few British equities in heavy volume this is bound to have a bad effect upon the bull market in Throgmorton Street. Surely this is a time when the British investor must walk very circumspectly.
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