A plague on shares
Nicholas Davenport
With seven-day money in "the street" securing a return of 11 per cent the lay investor must be saying to himself: "A plague on all my shares! I'm getting into cash." If he had read this column on January 6 advising him to cash in most of his profits, he might be feeling less anxious but the market has worsened since then. We are now confronted, it seems, with either a general strike or a general election thanks to the inflexible posture of Mr Heath. So cash seems all the more desirable. There is at present a plague on all shares. As the title to a FT ' leader ' so clearly put it, there is " too much to digest" for any investor since the currency upheaval. Virtually every market is now in a state of confusion.
To begin with, who can tell whether the 10 per cent devaluation of the dollar is good for us or bad? It is obvious that the Americans scored for themselves an immense victory, which Wall Street must sooner or later recognise. They have now got an undervalued currency to help their export trade and they are still threatening to put an import surcharge or quota on Japanese and other import goods. So confident are they that they can right their balance of payments they have already announced that they will be removing all remaining restraint upon external investment. Even the LET (investment equalisation tax) may be shortly removed so that New York can compete with the London and the Euro-dollar market in external financing. So we are faced with another challenge from the giant American corporations, the " dollar imperialism" (which used to upset de Gaulle), and our own multinational giants will have to meet deadlier competition.
On the whole I would say that the currency upheaval is a bear point for British industrial equities. It makes the rise in prices of raw materials and fuels used in British industry much more serious. During the last few months, raw material costs have been increasing at a dangerous rate. Expressed in annual rates of increase on the previous month it has been for October/November 22 per cent and for November / December 40 per cent. These raw material costs, most of which have not been allowed to be passed on during the freeze, could begin to affect significantly the growth of company profits generated in the UK.
It must be borne in mind that while sterling has been devalued only moderately — around 24 per cent — against the countries which have announced new exchange rates against the dollar but only 1 per cent if we take the rates in operation on the Friday before the US devaluation — we have revalued against or floated upwards from the currenoies of the US, Canada, the Bahamas, Turkey, Yugoslavia, Italy and Indonesia. The effect upon our retail price index is expected to be only per cent but the general effect upon our balance of payments could be serious. The 1973 deficit seems likely to go up from around £310 million to £500 million.
A devaluation of sterling increases, of course, the sterling earnings of companies gene rated in countries which have revalued upwards against us Thus, the earnings of ICI which are 50 per cent overseas, should be higher but the earnings of British American Tobacco which are derived from the dollar area (against which we have been slightly up-valued) must be lower. As regards South Africa, which has not followed the dollar down, the exchange of the rand dividends from the gold mines will be worth a little more in sterling — the parity has moved from R.1.84 to R.1.72 to the £ — but the gold mines will have to get 10 per cent more in US dollar sales to remain even. Earnings depend as usual on the free market price of gold and as gold will be cheaper for the Japanese, the Swiss, the French etc. there is reason to expect that the commercial demand for gold will strengthen and that the free market price will rise further. But what has upset the market in gold shares — and in the Australian mines — has been the sharp fall in the " dollar " premium which is now down to the very low rate of 10 per cent at the effective dollar exchange rate. What is more, the decision of the Labour government in Australia not to move with the dollar but to maintain the gold parity of the Australian dollar has been a terrible blow to the Australian nickel, iron ore and other mining companies which have to sell in dollars.
The poor British investor who has been whoring after these foreign sirens may be cursing his luck and regretting that he did not stay at home, where after all there has been a 64 per cent rise in the volume of consumer spending and a general boost to industrial and trading profits. But even at home he will now find himself caught again by ill luck. How much of these extra profits will the new socialist government of Mr Heath allow to be passed on? It seemed to me significant that when the huge rise in the profits of the joint stock banks were announced the market did not soar upwards; the shares went down. Does the market fear that Mr Barber's budget will put a special tax on profits of the most pampered beneficiaries of government monetary policy? Or remove the tax concession to the rich who have raised bank overdrafts to buy property or shares and then set the bank interest charge against their tax? The investor need not think of running out of the clearing banks into the merchant bank shares for they may be also discriminated against. Moreover they may be losing lucrative Euro-dollar finance issues to the New York market if the Americans abolish the investment equalisation tax sooner than is expected.
There is an obvious fear — perhaps too exaggerated — gripping the property share market seeing that under Phase 2 the Government has announced it will be controlling business rents. Details have not been released but it is expected that the control will be a general indexation of rents which will allow for annual increases, of say, 5 per cent, across the board. This may not be too bad but there may be special sanctions laid upon commercial developers. After all Mr Walker is longing to prove to the workers that he more than a match for Mr Harry Hyams and all the empty Centre Points.
So wherever he turns the lay investor finds that some blight has settled down on shares. He may well feel that he can no longer cope with all the complications and must hand over his portfolio to some professional management. But I can assure him that the professionals are just as perplexed as he is. They flounder about from market to market, hoping to strike it lucky if they keep moving. The 1973 edition of unit trusts performance published by an American firm with an office in Reading reveals that 41 out of 97 trusts failed to beat the FT Actuaries Index for the 1966-71 period even with net dividends rein vested. Still they did show an annual appreciation of 11.3 per cent.
But there are few investors who can sit calmly through a five year period when markets as a whole are tumbling down, booming up and then falling again to some unknown depth.
The latest figures from our unit trusts indicate that the investor has become extremely jumpy.
Sales of units in January were good at £43.7 million but withdrawals were historically high at £21.2 million — higher than in any month in 1972. Now that the total value of unit trust funds has risen to over £2,500 million the withdrawal risk could become an unsettling market factor. The bad perform ance of the mutual funds in America has virtually driven the private investor out of Wall Street. Let us hope that the same thing does not happen in Throgmorton Street.
Previous page
