MONEY Snakes and ladders 1971
Nicholas Davenport
Last year the Stock Exchange game was almost unplayable. There were so few ladders to climb up and so many snakes to slither down. This year the game has been exhilarating. It began with a slither down but ended with a dizzy climb up lots of ladders. For the bear market ended on March 2 when the FT index of industrial shares touched 305. It had lasted two years and two months and the fall in equity shares had been 41 per cent. Within five or six months there was a rise of close on 40 per cent. Usually the recovery from a bear market is at first gradual and the pace of this exceptional rise was too hot to last. From 430 on September 9 it fell to 398 on November 1, but thereafter it never looked back and as I write it is touching 466. Such a strong movement has convinced every chartist that this is a bull market of the major sort which is likely to last — if Mr Heath stays in power — for at least two years and saore the usual advance of well over 100 per cent. Exactly a year ago I concluded my review with the words: "The bear market will be closing in the first half of 1971 and the next bull market will be starting up by the time another Christmas comes." I recall this prophecy not to boast but to express my surprise that the market exceeded my expectations to such an extraordinary extent. I did not expect that it would have such devout and unshakable confidence in Mr Heath's quiet revolution. For six months after his election the wage-cost inflation went on raging, the economy went on stagnating and companies went on getting into financial trouble. The Policy of de-escalation of wage claims was not seen to be working until long after the bull market had started. Even now, when the Marxist left is still trying hard to capture the Labour party, but with lessening success, there is still the possibility of a show-down with labour, starting, as usual, With a national coal strike. But I do not believe that anything Can now upset the market's sublime confidence in Mr Heath. For the first time it has got a strong Prime Minister who not only intends to help the Poor, reflate the economy and bring down unemployment but to cut direct taxation and help the investor. This is the favourable conjuncture of politics and economics on which the major bull markets feed.
The performance of many leading shares has been astonishing. Some have already doubled. Those two ' star ' performers in the property section are still going strong Star has risen from a low of 100 to 256 and Trafalgar from 69 to 150. The suspected lame duck British Leyland pulled itself up from 30 to 54 and one motor distributor — Caffyns — has jumped from 68 to 140. The giant GEC scored nearly 100 per cent — from 90 to 170 — and Thorn — from 256 to 450. Granada followed closely — from 235 to 433. The stores responded to Mr Barber's reflation of consumer demand with rises of 50 per cent or more — Marks and Spencer from 192 to 294, GUS ' A ' from 180 to 287 — and United Drapery from 78 to 138. The joint stock banks did even better — Lloyds from 310 to 580, Barclays from 327 to 576, and National Westminster from 323 to 580. It is really time for some of them to pause.
There have also been astonishing recoveries in some shares of the capital goods industries although there has been little or no improvement in industrial investment as a whole. Indeed, our machine tool companies are still in the doldrums. This market faith in the success of Mr Heath's economic policy is quite awe-inspiring. After its remarkable rise the industrial share market is now selling' at about eighteen times 1971 earnings which is well above Wall Street. On the assumption that the economy will grow at Mr Barber's estimated rate of 4i per cent, there could be a dramatic turn round in company profits after the great lay-off of redundant and too expensive labour. When factories now working under capacity begin to lengthen their production runs there is bound to be a big increase in the productivity of the reduced labour force. It is therefore possible that 1972 will see a rise in company profits of the order of 20 per cent which would bring the prospective price-earnings ratio down to I4i per cent. So the market, though high for the moment, is not too high on the 1972 prospect.
What makes the London market unique is that it began its recovery long before any other market. In Wall Street the bear market went on until November when the Dow Jones index touched 798. It has now recovered to 870. But the European markets are still falling because they are more sensitive to the recession in world trade. The Australian and South African markets suffered the shock of a catastrophic fall in metal prices, and it is only in the last month or so that Australia has begun to show signs of recovery. Western Mining fell, from 247 to 90 and has now recovered to 130. The great Broken Hill Proprietary tumbled from 654 to 420 and is now 554. South Africa has seen De Beers fall from 258 to 165 — now 236 — and Union Corporation from 223 to 120 — now 145. There are precious few gold mines which can boom even on a free gold price of $43. Perhaps the worst disaster of the year was the fall in nickel prices from a scarcity price of £6,000 to £1,000 a ton and in platinum prices from E110 to £42 per ounce. This caused Poseidon to drop from E22 to e6 and " Pots " Platinum from 212 to 69 — now 87.
Finally, any investor who specialised in new equity issues has enjoyed a bonanza. Some of them have more than doubled their issue prices.
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