The Stock Exchange Year
By NICHOLAS DAVENPORT f.g.Z nearly the worst. This divi- sion cuts through the pro-
FOR the observer the Stock Exchange year has been fascinating. For one type of investor it has been the best ever: for another it has been fessionals (jobbers and brokers) of Throgmorton Street as well as the out- siders. for it all depends on Whether you have been investing in British Government bonds or in equity shares. On the one hand, the gilt-edged market has enjoyed a boom—the first since I958—on the other hand, equity shares have been receding and in some groups slumping. To make matters worse for the professionals, the capital gains tax which Mr. Selwyn Lloyd introduced in his Budget had a freezing effect upon the volume of business. The short-term speculator has been, in fact, driven out of the market and as a result the movements in equity prices have been much more extreme than they should have been. This Particularly applies to new issues.
ro take the gilt-edged market first, the rise actually began in the late autumn of 1961, and after sonve hesitation in the opening months of 1962 gathered great strength in the summer. By the end of September the market as a whole had _
risen by 16 per cent. and the lone-term rate of interest had fallen from 61 per cent. to 51 per cent. During this period Bank rate was re- duced from 6 per cent. to 41 per cent. and the Treasura. Bill rate from 61 per cent. to 3.7 per cent. The Treasury certainly made hay while this remarkable sun was shining. Its funding opera- tions were colossal. It issued to the public £300 million of Treasury 5 per cent., 1986-89, in May and £500 million of Treasury 51 per cent., 2008-12, in September. (The last tranchc were sold in only six weeks!) Its net sales to the public was over £400 million. If it had not been so persistent in its funding operations the long- term rate of interest would have fallen much further and a greater stimulus would have been given to industrial investment, which is still fall- ing away. But, as I said the other week, the Treasury continues to worship false monetary gods and blindly believes in a relatively high 'equilibrium rate of interest. However, the Gov- ernment broker has lately been supporting the market and the authorities would probably not object to seeing the long-term rate of interest fall to, say, 51 per cent.
Coming to equity shares, the market was more or less steady for the first four months and then fell abruptly by 16 per cent. in a matter of two months. Everyone will remember 'Black Tues- day'—May 29. Wall Street had dropped on the previous day by 51 per cent. to its lowest level since OctOber, 1960—the sharpest break since the days of the great slump of 1929. London followed with a fall of over 7 per cent.—the biggest single day's drop since the index was compiled in 1935. By the end of June the index had slumped to 252.8—lower than it was before the general election (261). From this bottom the market rose by as much as 16 per cent.—helped by the recovery in Wall Street (which began in October) and by Mr. Maudling's first step towards the re-expansion of the economy. In- deed, the recovery was so convincing that many market observers—Custos included !—began to think that the bear market in equity shares which had begun in May, 1961, had finally come to its end in June, 1962. This cannot now be re- garded as certain. The present recession- 5 per cent. down from the top—brought on by the alarming uncertainties about the Common Market and the general election--
could bring the market down again to test the low level of June, 1962. If it breaks through that
level it will mean that the late recovery of 1962 was merely a secondary one in a long-term bear market which will go on until the turn finally conies-- Deo volente—in 1963.
It is significant that the continental bourses have followed much the same pattern as Lon- don. In Germany the bear market actually began
in September, 1960, and reached its low .point in October, 1962. The recovery since then has
been hailed by some brokers as the beginning
of the turn, but it could also be a secondary recovery in a long-term bear market. The fall this year has been about 40 per cent.- - nearly 50 per cent. since the high of 1960l The Dutch market has fallen this sear by nearly 14 per cent. and is now about 30 per cent. below its 1961 high. The Italian market has dropped by nearly 9 per cent., the .Belgian by 6 per cent. and the French by over 15 per cent. Most pro- fessionals in Paris are talking their market lower. Indeed, of all the recent recoveries Wall Street has up to date been the most convincing, but even here there are some professionals who believe that it is a false start. Everything, there: fore, hangs upon the American economy climb- ing back to a boom. Mr. Kennedy is doing his best by pressing forward with his tax cuts in spite of his colossal budget deficit, but Wall Street does not always follow Washington.
Of the performance in British equity shares last year, the worst has been that of the finan- cial group. Strangely enough, insurance shares have been the most shocking of all, falling by about 25 per cent. This market attracts few buyers today, partly because of the low yields. partly because the composite companies hav e had a bad underwriting year. Property shares remain out of favour—the political shadow falls perhaps too darkly on this market—but hire- purchase shares have succeeded in making some recovery from their slump levels of the summer. It was the industrial share markets which pro- duced the sharpest individual recoveries of 1961 —from 50 per cent. to 80 per cent. in the boiler group and 25 per cent. to 50 per cent. in the heavy electrical group. These sharp contrasts should serve to bring home the investment lessons of the past two years—that the indis- criminating cult of the equity share was madness and that the analyst who can produce an equity winner is a man to take out to dinner.
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