MONEY Investing under Tories
NICHOLAS DAVENPORT
Looking at the index of equity share prices you would think that the Stock Exchange disapproved of Mr Heath and all his works. After its initial post-election recovery of around 17 per cent it has fallen steadily and is now almost back to where it was under Mr Wilson. Indeed, those who study the charts predict that it will fall from its pre- sent level of around 330 to 260 or below, which would be 50 per cent below the peak of the last bull market. If that proved to be the case ordinary shares would be back to where they were eight years ago. Why on earth, you might ask, does any one bother to run after them and acquire a headache?
There is no doubt that confidence in the future of equity investment has received a great shock. This is brought out by the fall in the net sales of unit trusts from a peak of £20 million to under £5 million a month. In theory, of course, the equity remains the only type of investment which can offset the de- cline in the value of money but in practice if often fails to do so for long periods. I notice that one of the unit trust manage- ments recently took a whole page in the Financial Times to show how shares had beaten the inflation. The period they took was from 1950 to end-September 1970 during which the purchasing power of the £ had dropped from 100 to 45 and the real value of £100 invested in the Fr index had risen to £159. But different periods could show an opposite result. Besides, up to the present year the British inflation has been a creeping one while now it looks like galloping. In such circumstances companies may see their pro- fit margins disappear and their dividends be- come uncovered.
The equity cult was based on the theory that full employment meant growth and growth meant an annual increase in the turnover and trading profits of companies in the private sector. The statistics seemed to point to a secular upward trend in eqUity shares. So the cult of the equity was born. It ran into trouble when growth could not be maintained with price stability. To stop an inflation governments began to interfere with growth, so that the automatic growth of company earnings, let alone net profits, could no longer be guaranteed. That killed the equity cult and no miracle is expected from Mr Heath to restore it to life.
A test of the public reaction to equity investment will be demonstrated this week when 5.7 million ordinary shares of Pilking- ton Brothers are offered for sale at 34s. In the heyday of the equity cult there would have been a scramble for this 'blue chip', but times have changed. Labour has attacked the Pil- kingtons. The seven-week strike this year cost the company £5 million. Profits for the year to March 1971 are estimated at £10.4 million before tax of which £8 million comes from the 'float glass' process licensed to other glass manufacturers. This compares with £161 mil- lion in 1969-70 and £201 million in 1968-69, 50 per cent drop in profits is a sobering, thought. At 34s the price-earning ratio on
the profit forecast is 18.6 (which is high, the average for the industrial market being 13.7) but this would drop to 12 if the strike effects were eliminated.
If the Pilkington issue goes well it will mean that popular faith in equity investment, though shattered, is not entirely dead. I only hope that investors will not be misled by any chance success and chase the shares madly upwards. It was the pioneering Pilkington Brothers who made the millions and it is the public who are being asked in to help them quietly—and in small amount—cash out. If on the other hand the issue goes badly it will merely mean that the issuing house has mis- judged the market and that the professional investor has decided that Pilkington shares will be a good 'buy' at a lower price..
What we are seeing in the equity market is not only the end of the equity cult but the start of a more realistic equity investment policy under the Tories. Companies will no longer be mollycoddled by governments They will have to stand on their own financial feet. If they cannot meet the wage explosion by increased productivity or management skill they will have to fall. Rolls-Royce was an exception because of the national interest in aero-engine manufacture, but the shares have tumbled this year from 25s to 9s. British Leyland may survive without government help but the shares have dropped from 13s 6d to 5s 6d. I am sure that Mr Davies would if necessary come to the help of British Ley-
land because he has said that it would be folly to abandon great sectors of the coun- try's productive capacity at the moment of their maximum weakness, but this does not underwrite the capital structure of the com- pany. Holders of debt could end up with equity shares and holders of the equity with deferred shares. Clearly there are going to be violent upsets in the equity share markets while the Tory policy of ruthless realism is being carried out.
The Stock Exchange has gone through such crises before and I suspect that the pro- fessional investor will be accummulating equity stock when the market is panicky and friendless, as it is today in anticipation of another equity share boom in, say, twelve months' time or early 1972. He has not for- gotten that the Tory government has prom- ised to reform Labour taxation which penal- ised the equity shareholder, especially the holder of overseas companies, and also to abolish SET which penalised the service trades. The taxation slant against the equity portfolio investor will in course of Tory time be removed. All this will change the political climate for equity investment from adverse to favourable and when the economic climate veers at last to 'set fair,' then this happy conjecture will be the signal for another bull market. That surely is the professional in- vestor's dream.
The prevailing gloom about the economic prospect has perhaps been overdone, as Lord Jellicoe suggested in the House of Lords de- bate. The previous wage explosion of 1965, when wages and salaries increased by f1,300 million and output in real terms by £600 million, did not prevent a bull market in equity shares in 1968. The present wage ex- plosion, which may put wages and salaries up by over £2,000 million, with the increase in real output running behind at £1,000 million, may also not prevent the return of a bull market in 1972 if the Tories stay in power. The accent may be on that 'if'.
ffolkes's investors' alphabet
Qis for Quotation
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