25 DECEMBER 1964, Page 22

The Economy

Annus Horrendus


THE late Lord Dalton called 1947 'annus horren- dus' because everything went wrong for the then Labour Government. The investor will dub 1964

The year began nervously with a dip from 351 to 322 in February because of the election un- certainty. Then came a recovery to 352 by April and a relapse to 335 by June. Thereafter the market rose strongly on the election polls which revealed that Labour was losing its lead. The peak of the market was 378 on October 1 when a Tory victory seemed likely. Then came a gentle fall on the slender Labour victory and finally a violent slump as the City lost its confidence in government management, first, of the sterling crisis, secondly, of the vital matter of taxation reform. The pity of it was that half of all this trouble was needlessly brought on. It really was not necessary for ministers to prompt and exacerbate a flight from sterling by imposing a 15 per cent surcharge on imports without con- sultation or polite warning and then excuse it by saying that our position was desperate. It really was not necessary for Mr. Callaghan to bring the investment machine to a halt by ill- defined statements of the new company tax and capital gains tax and threati of dire penalties for tax avoidance. How much better it would have been if the Chancellor had said that he would postpone tax reform until the Government had solved the exchange crisis.

As I write, the Financial Times index has dropped by nearly 15 per cent from its high (378) and looks like falling further. Some brokers talk it down to the 252 level of June 1962. But this Financial Times index does not reveal all

the vicissitudes of the investor caught in the various reactionary groups. Some groups have behaved reasonably well, notably textiles, heavy electricals and, until the last month or so, the oils. But a ghastly, performance has been put up by the insurance group, by properties and by merchant banks and investment trusts. In fact, the whole of the financial sector has been out of favour. It seemed that the market was fearful that a Labour government would single out the' financial community for discriminatory taxation. The life insurance group fell by 20 per cent from its top and the composite insurance by 23 per cent (being more sensitive to underwriting losses than to government interference): The mer- chant banks fell by about 27 per cent and the investment trusts by 18 per cent. The fall in the merchant banks was perhaps overdone and when they reveal their assets on April 8 for the Domes- day reckoning they . may look cheap. Property shares were the worst sufferers—showing falls up to 30 per cent—because they were the most vulnerable to the new taxation. I would not be surprised to see many property companies going into voluntary liquidation in due course because of the inroads of the corporation tax.

The oil group has been badly mauled. It started the year well and gained a .big following in the unit trusts because of the high yields offered. Indeed, it behaved bullishly right up to the summer, by which time it had advanced by nearly 20 per cent. But by the end of the year it had lost all this rise and more. It finished by being 16 per cent below its top. The Chancellor had hinted that as companies like Shell and BP have been paying no UK tax they might be badly hit by his tax reforms. Of course, an oil company operating abroad has heavy foreign taxation to bear and it may well be that a hold- ing company like the great Shell Transport and Trading will be forced by the incidence of a corporation tax to liquidate and distribute its holdings. Its asset value would, of course, be much higher than its market price.

Among the commercial and industrial sections the retail trade or store group has been very disappointing in market behaviour. In spite of all the consumer affluence the stores do not seem to have enjoyed a boom except for the few top

managements in the supermarkets. Marks and Spencer, which had to bear the death of Lord Marks in December, fell from a high of 48s. 444 to 32s. 9d., a loss of a third. Even in the Indus• trial group, whose companies have been issuing brilliant reports to mark the profit expansion, it is hard to find a share which has ended the year at a higher price than at the beginning. Somel, new 'growth' or recovery share may have gone up, but, the great ICI is typical of the rest of the industrial market: it recovered in price al the good half-year earnings were reported, but

it slipped away after the Labour victory and the • forecasts of the corporation tax. It is now 15 per cent below its 'high.'

But the most disappointing market in the Stock Exchange has been gilt-edged. Everyone had ex- pected it to go ahead, even on a Labour victory, for Mr. Wilson and Mr. Brown had talked of cheaper money and cheaper mortgages. But the sterling crisis broke with unprecedented fury and engulfed the market in a dearer money compleS than it has seen even under the Tories. The pool local authorities have been forced to pay 8 pet cent for seven-day call money. What plunged the gilt-edged market into gloom was the stubborn refusal of the Chancellor to say that the life assurance companies would be exempt from the capital gains tax in the gilt-edged market. As their whole business of selling policies is based upon the calculation of gross and net redemption yields on government stocks, this brought the gilt-edged market virtually to a standstill. The government broker had to come into the market on December 17 and tell the jobbers that be would buy at certain prices. So the market is pegged—as in war-time! But if the Chancellor would only say that the life companies can go on operating as they do today in the gilt-edged market free of capital gains tax there will be 0 normal recovery and a return of confidence.