' In the City
Risks and rewards
Tony Rudd
Q tand up, those who made a fortune in Li 1981. It's a very small minority out of those who tried. The ingredients of a money-making background are enthusiasm and success. Markets in 1981 were not places of real enthusiasm precisely because the underlying events which they reflected were far from successful. 1981 was a year of worldwide recession.
Of course there were opportunities; there always are. The Cable and Wireless issue was one of the most obvious; a gift for the speculators who always seek the virtually risk-free punt. The quotation of the fabulously successful money brokers, Exco, brought speculators, by contrast, very little gain; it was strictly a success for the pro- moters. By and large the profits on the Stock Exchange were made in takeover situations and, for the plucky, in 'bombed- out' shares which did not after all go bust. For instance, ICL, the great computer com- pany which came near to an untimely death during the year, fell to below 30p, the shares recovered before the recently an- nounced (and very brave) rights issue to around 50p, a huge rise by anybody's measure. There were other such in the engineering and manufacturing industries. It was not a year when great fortunes were made out of fixed interest stocks. Despite the willingness of investors to believe that this time it's going to be different', it wasn't, and some sizable sums of money were lost in consequence. The paradox in this market remains that the more 'up- market' the advice, the more elegant the monetary statistics supporting the case, the more you can lose. Money was undoubtedly made in the cur-
rency markets. It was certainly very fashionable at the beginning of 1981 to take a bearish view of sterling and as the curren- cy depreciated by over 20 per cent from its high, which was an enormous move, those with open positions, gambling on exactly such a movement, made fortunes. Some of these were handed back of course when, much later in the year, sterling bounced vigorously to near $2 to the pound at one point about a month ago. Money was made by those who perceived the trend towards a stronger D-Mark this summer but there again those who took this view have had to be lively on their feet in reversing it in time to avoid the current bout of weakness in both the German and the Swiss currencies. It has not been a year for the gold bug. Ad- mittedly the market stabilised this year and the very bearish expectations of a fall in the price to around the $300 an ounce level did not come to pass; on the other hand the rally which began in the summer petered out at about the $450 an ounce level and did not turn into the 'great recovery' which the very disagreeable combination of political events occurring in such places as Poland and the Middle East led many to suppose was going to occur. The popular explana- tion for this relatively lacklustre perfor- mance is that the Russians have been selling their stocks of gold into the market whenever the latter was strong, simply because they needed the money to pay for food and other imports. That's a reasonable explanation, but it still remains the case that the nervousness of markets in 1981 has not been translated into a great panic run into the classic 'inflation hedges' so popular in the past.
Perhaps the most sinister development, certainly in London, has been the steady fall in the volume of business, particularly during the last few weeks. As a former deputy-governor of the Bank of England once said, he didn't mind whether the gilt market went up or down, so long as it was active. What he meant was that unless peo- ple traded, the Government couldn't really sell stock. And so it is in equity markets; very little can happen unless there is a good volume of business, and the volume has fallen to almost disastrous levels. Institu- tionally this will mean, inevitably, more talks of mergers and a weakening of the structure. Technically it probably means that the market is becoming poised to move sharply one way or the other.
So at the beginning of 1982 we are at the crossroads. Those who argue that we are in for a boom point to the undoubted recovery in profitability which is likely to happen dur- ing the year. It only needs the economy to cease falling for that to occur, in reasonable measure. We don't have to predicate the unlikely prospect of an economic boom in order to have a share boom. Secondly there is the renewed prospect of a fall in interest rates in 1982, for, although rates are taking an unconscionable time in coming down, they must do so eventually. A third point is that, allowing for inflation, the market does not place a high value in historic terms on British industry. But as against these com- forting thoughts there are impending threats to the security of markets. The most obvious one is that the Polish debt goes up in smoke. The knock-on effect of many billions of dollars having to be written off both in commercial bank balance sheets and, eventually, in the budget provisions of governments who will be forced to support these banks could be considerable.
There are many who hold the view that the credit and banking structure in the West is dangerously overstretched and over- geared and that it only needs a big default to make the whole thing totter and crumble. If the entire mountain of debt which the Eastern block has incurred in Western capital and banking markets begins to look doubtful as an entire category then, certain- ly, the scene would be set for a major col- lapse in credit markets which conservative- minded financiers have been worrying about for years if not decades. Anybody who wants to take a cautious view about the outlook in 1982 can point to a wide range of reasons for so doing, for instance the fact that inflation is alive and well, despite all at- tempts in the US and the UK to kill it, and that the burden of the public sector on the private is still growing despite every attempt to prevent it doing so. And Western govern- ments seem to have lost their ability to resuscitate their flagging economies. But of all these possible bearish arguments the doubts about the international credit struc- ture must take pride of place. One cannot conceive of a better excuse for choosing one's risks carefully and for turning a deaf ear to the salesmen from the brokerage offices.
Previous page
