In the City
Bullish
Nicholas Davenport
The past year may have exasperated the private investor trying to look after his own portfolio but it has been an exciting one for a financial columnist like me. Money is a chamelon, taking its colour from the changing political and economic world outside, so the column writes itself.
Before me lies the chart of the FT index of thirty industrial equity shares for the past three years. From its low of 150 at the beginning of 1945 it shot up to 420 by April 1976. This was the recovery from the extraordinary 1974 panic which had seized the old boys' brigade in the City — the directors of the great life and pension funds who, thinking that the Marxist manifesto of the new Labour government meant that the private enterprise system was finished, had stopped buying equity shares and had gone into cash 'on the street'. After the recovery to 420 the market ran into another depression phase over the slump in sterling and the 'Britain is finished' talk which brought it down to below 280 by the autumn of 1976. Then began the remarkable bull market which carried the index up to 549 by 14 September 1977. I call this the Callaghan bull market, for it was entirely due to the confidence he restored by rejecting the Marxism of his left, dropping further nationalisation, and supporting the mixed economy. The Liberal pact was a guarantee of no further socialism.
The Callaghan bull market beat the bull markets of Harold Wilson and Edward Heath. Wilson scored (after the devaluation of 1967) a rise of 83 per cent, Heath a rise of 80 per cent but Callaghan no less than 96 per cent. No Labour prime minister has ever pleased the market better. My friend George Hutchinson should know now why Callaghan is my hero.
Has the Callaghan bull market collapsed? The index has come down from its 549 to around 474 as I write. This is quite a normal reaction after a dazzling rise and I would say that we now have a bull market in suspense. According to Davenport's law a bull market requires the conjuncture of favourable politics and favourable economics. A general election cannot be far away and the market has yet to make up its mind whether it would prefer Callaghan with moderate socialism, that is, with no further nationalisation, less deficit spending, less taxation and less union unrest, or Margaret Thatcher with much less taxation, better company profits but possibly more union unrest. It would probably opt for Mrs Thatcher and give her a quick market upturn before the inevitable relapse.
As for economics I cannot see any early recovery from the trade recession. If the price of oil goes up again at the Caracas meeting of the OPEC next month the world recession will be prolonged. If may become serious enough to necessitate a debt moratorium for the developing countries. The restoration of market bullishness will therefore depend largely upon the April budget of Mr Healey (it is assumed that Mr Callaghan and the Liberals will not seek a general election until after this votecatching exercise). Some improvement in the consumer trades is therefore to be expected but the export recovery will falter as sterling rises against the dollar and world trade remains in the doldrums. Although the Bank of England in its latest Bulletin predicts 'a more hopeful phase for the economy' I cannot see enough economic recovery to justify the resumption of the bull market. But with a visible trade surplus and an enormous surplus building up on the balance of payments for l 978 I do not see a bear market developing. The bull market remains in suspense.
I do not tip shares in this column but the private investor who remains bold enough to continue operating in a market now dominated by the big pension funds could have made some spectacular profits in the Callaghan bull market last year. For example he could have doubled his money in KwikSave and Martins Newsagents, and even if he had kept to the store leaders he could have enjoyed a 70 per cent rise in Marks and Spencer. In the electrical market he could have got 60 per cent from GEC or 80 per cent from Thorn. Even in the depressed building industry he could have doubled his money in London Brick and 'Funnel if he had bought near the bottom and sold near the top. If he had sought out what the market calls 'recovery' stocks he could have had nearly 120 per cent in Beaverbrook (up from 32 to 70 since its acquisition by Trafalgar House), another 100 per cent rise in the speculative Ultramar (up from 116 to 266 and now 232) and 200 per cent in Metropolitan Estates —up from 42 to 131 in the depressed property market. An 80 per cent rise was offered by several leaders (Beecham, for example). It was not an easy 'Market to operate in, for the swings were steep, but there were rare profits to be made. Lucky were the buyers of Campari which rose from 25 to 124.
But if I don't tip shares I do tip government bonds and I can claim a resounding success for my recommendations in the gilt-edged market. I knew that raising MLR (the monetary-mice lending rate) to 15 per cent in October last year was an act of madness and that money rates had to come tumbling down if we were to survive as a great trading and manufacturing nation. The MLR drop to 5 per cent in twelve months created one of the biggest booms the gilt-edged market has ever seen. It enabled the Bank to sell a record £7,500 million of 'tap' stocks to the non-bank public. When you can double your money in gilt-edged it is a far better gain than in equity shares, for no capital gains tax is paid if the stock is held over twelve months. Since 1975 we have seen Gas 3 per cent 1990-95 up from 24 to 50 and the shorter dated Treasury 5 per cent 1986-89 up from 38 to 72. Where else could you double your money in two years without real capital risk? Because the prime minister, aided by his monetary colleagues Mr Denis Healey and Mr Harold Lever, was behind the cheap money drive, I call the gilt-edged boom the hall-mark of the great Callaghan bull market.
The recent mistaken rise in the MLR from 5 per cent to 7 per cent caused a shake-out in the gilt-edged market but I am still bullish. While the world recession lingers — and perhaps gets worse — we must have still cheaper money for business to revive. And if we are going to have a surplus on the balance of payments of £2,250 million in 1978 do you not suppose that foreigners will regard our government bonds as worthy of a higher credit basis than 11i per cent for the 'longs' and over 9 per cent for the 'shorts'?
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