Back to gilts?
PORTFOLIO JOHN BULL
There has been an important improvement in the tone of the gilt-edged market in the past few days. Business began to pick up a week ago, gathered pace on Friday and again on Monday. For the first time since last September, the institutions have been pumping some real money into the market. One estimate for the amount of new funds committed last Thursday and Friday is £50 million. How can this mini-renaissance be explained?
Surprisingly there is no general confi- dence that interest rates have stopped rising. Ondeed last Thursday the Germans an- nounced higher bank rate and over the weekend the Italians produced a partial rise (depending upon the size of funds in- volved) in their discount rate. The buying springs from the belief that the present level of returns available in the gilt-edged market is much more attractive than the likely re- turns available in the equity market. And there is the added advantage that the former are secure and free of capital gains tax. So institutions such as pension funds and insurance companies which invest on a long term basis (and which have funds coming in every day of the week) are back in the market. Sentiment also continues to reflect the rather good May trade figures and the not-at-all-bad first quarter balance of payments figures. Talk, too, of a £300 million surplus in the current financial year has helped (late and comparatively small though that outtum is).
And there is a technical factor to notice. The gilt-edged market is in an over-sold condition, in other words everybody who could possibly exit has done so. Thus when the market turns round there is no slack to be taken up. Finally, the private investor, particularly the surtax payer, has re- appeared as a buyer of gilts, hoping to ride along on the backs of the institutions. Equities, by contrast, are still relatively friendless, though there was a rally on Mon- day, and my two portfolios reflect some rather nasty falls.
All the same, this is not the moment for making a general exit from the market. That would only be worth doing if you thought that share prices looked like falling at least another 10 per cent or so (taking the FT ordinary share index down to below 350). The right exercise is to hold on to the solid blue chips which will lead the re- covery when it comes (shares such as Bowater, British Leyland, EMI, and GEc) and to dispose of the more speculative counters. The shares which did wonderfully well in the last stages of an old bull mar- ket are often those which fall hardest when the market turns—and get, left behind in any subsequent recovery. Certainly buyers of equities this week (who pushed the FT index up by 9.9 points to 388.6 on Mon- day) have been most active in the blue chip list.
The J. Lyons accounts, which were pub- lished on Tuesday morning, fortify my case for holding the shares. Profits have risen sharply for two consecutive yearg now In
the past, Lyons' profits record -bas . been .
bumpy, the trend often being determined by the Weather and its impact upon the group's ice cream business (one of the two largest in the country) and, to a lesser extent, by its impact upon frozen food sales. What we are now seeing, however, is something quite different, an increase in profits based upon years of rationalisation, pruning of mar- ginal activities and expansion of growth points. Lyons is living up to the policy out- lined by the new chairman, Mr Geoffrey Salmon-10 concentrate on those activities where the greatest potential lies, to ra- tionalise systems and to reduce overheads'. Thus I think one can assume that the im- proved margins and return on capital em- ployed will endure, indeed improve further.
Second, one should not view Lyons merely as a tea-shop group. The company is sub- stantially involved in a number of growth areas. And it has the inestimable advantage in these hard times of having a ready source of cheap finance—the proceeds it gets from the sale of surplus, low-yielding property. The balance sheet for 31 March 1969 shows, for instance, overdrafts totalling £19 million. But since the year-end the group has sold for nearly £6 million 'certain properties which we did not occupy and which were currently only marginally profit- able'. And there is more to be sold when conditions dictate. In sum, therefore, the company and the shares are strongly based. I am happy to hold them in my first port- folio—even while equities are down.
Valuations at 23 June 1969 First portfolio 100 Empire Stores at 51s .. •.. £255 125 Phoenix Assurance at 32s .. £200 330 Witan at 17s 9d £293 500 E. Scragg at 18s 3d £456 500 Clarkson (Engineers) at 18s 6d £462 60 Rio Tinto Zinc at 108s £324 1,000 Associated British Foods at 8s 61d £428 1,000 Jamaica Public Service at 6s 3d .. • • £313 133 Electric & Musical Industries at 45s 6d .. • . £302 100 Lyons 'A' at 73s . . £365 200 British and Commonwealth Shipping at 34s 3d £342 200 Forte's Holdings at 43s 6d .. £435 200 Bowater at 52s 3d £522 1,000 English Calico at 7s 4.14 .. £369 Cash in hand .. £1,123 £6,189 Deduct: expenses £260 Total £5,929 Second portfolio 600 Pillar Holdings at 15s 41c1 15 Kaiser Steel at £36 12s ..
250 Lonrho at 42s 9d ..
100 British Petroleum at 135s 6d .. 300 Vosper at 16s 1.000 Allied Breweries at 14s 9d .. 300 J. Bibby at 24s 6d 100 Rurmah Oil at 97s Cash in hand .. £4,967 Deduct: expenses £185 Total £4,782
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£461 £550 £534 £677 £240 £738 £367 £485 £915
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