As the City sees it
Nicholas Davenport
After the collapse of its phoney base — the FT thirty index at one time was only A point above 300, its lowest level for six or seven Years — the equity share market is now trying to go back to the 330 level from which it descended. The market hope now is that the TUC
Will be able to persuade the•miners' union to stay their strike
to allow the machinery for assessing relative pay to be set up and get to work. The implication Is, of course, that the miners will then be given much more than their recent offer under Phase 3. This would save the Government's face, Phase 3 remaining untouched, and at the same time save the face of Joe Gormley who has been demanding more cash on the table — and thumping the table very hard.
Here I must cross swords with our Editor who has been agreeing With Mr Harold Wilson that Phase 3 has been unjust and unworkable — and all the other Phases. The fact that about five million Workers, including the important Power workers, have now agreed to settlements under Phase 3 does not suggest that it is unworkable — except for groups like the miners whose relative pay structure had got out of line. The pay board has just reviewed the operation of Phase 2. Sixteen and a half million people settled under Phase 2. There were about seven thousand agreements and almost every one was at or near the limit unposed by the code. In the national agreements the average rise under Phase 2 was 8i per cent for manual workers and 7 per cent for non-manual. Phase 3, with a more flexible and generous (i.e. inflationary) code, may allow an average of around 11 per cent. The miners will obviously get more than 16 per cent. So, with Phase 1 a freeze, Phase 2 a success story and Phase 3 nearing completion, if the miners are settled, it can hardly be said that Mr Heath's counter-inflation policy has been unworkable. Whether it can be called unfair because it was not in his mandate I do not know.
Statutory income policies cannot, of course, be a permanent feature. of an industrial democracy — we cannot govern without the consent of the governed — but for a limited time to meet an inflation crisis they are a necessary inflic
tion. Last year raw material prices rose by no less than 45 per cent and retail prices by 9A per cent. Average wage earnings increased by 12.3 per cent. On top of all this comes the quadrupling of the price of oil and an industrial hold-up by the miners. The inflation crisis therefore remains. As long as the communist-dominated unions insist on forcing wage claims which can only raise prices and depress the standard of living of their weaker comrades a wage-cost inflation crisis will persist until a world depression takes over, knocks all raw material prices and pushes up our unemployment over the million mark.
As the City sees it we have two crises, one superimposed on the other. The first is the threat of something like civil warfare if the miners strike. There is bound to be fighting at the picket lines, not only because of the political, and bloody-minded, mood of the communist militants, but because the act of picketing has been more clearly defined in the courts and because the police are now better organised to control it. This sort of crisis — superimposed on the other — would be disastrous for the nation and would push the FT index down below 300 — perhaps to 250 or below. The other crisis is whether after the miners have been settled the inflation can be contained if the trade unions are not prepared to co-operate any further in an incomes policy when Phase 3 has been completed. This crisis will not be settled, one way or another, without a general election. Even if Mr Heath is returned the question will still remain as to whether the economy can be managed without a consensus between government and TUC.
If eventually the answer is in the negative the investor will then be looking outside this country for the main base of his portfolio. There are plenty of opportunities overseas if the investor is prepared to pay the prevailing ,dollar investment premium of 221 per cent. (There are two or three investment trusts wholly invested in the US or Europe which have a sterling capital and therefore purchasable free of premium.) I have already said that I do not favour South African gold shares, first because they are a narrow market dominated by the Americans, second because the mines tend to downgrade their ore as the price of gold rises and so upset your yield calculations, third, because working costs are continually rising, which is a worsening factor if the grade of ore is simultaneously lowered. It is far better to buy gold coins than gold shares if you are prepared to go without the income. At the moment, as the price of gold has temporarily come back to $135 per ounce, it might be a good time to buy Kreuger-Rand gold coins which are 99.9 pure gold. Their price is now £62 per coin, having been as high as £72.
A leading firm of brokers has suggested to me a stock which they think is better than gold shares or gold coins. This is the French Rente Giscard, which has unique gold backing and none of the complications or political risks associated with South African gold shares. The Rente Giscard is a French government loan repayable in 2007 at 250 which may be tendered by French citizens in payment of death duties and transfer taxes at a price which is linked to gold. The acceptance price is fixed on May 15 and November 15 each year and is based on the average price of the gold 20F. coin called the Napoleon, currently selling at 185. If this price is held up to May it would indicate that the next acceptance price will be around 514. The current market price of the bond is 415 — up from 350 in the last month. The only snag I can see is that the Napoleon coin stands at a premium of nearly 70 per cent over its gold content, a premium which could be eroded.
To sum up the City point of view. We have the two crises — potential civil disorder and, if that is averted, a potential hyper-inflation, which will require restrictions to be placed upon prices and profit margins for some time. When the election has been held it may then be possible for us in the City to work out our sums, that is, to calculate the future of earnings and dividends of our industrial and trading companies. We are not yet in the position to calculate at all, and when we do we may find that the sums do not justify the level of the industrial share index after its rise on the settlement of the miners' strike. We may then be forced to look at investments overseas. I regret that I cannot be more hopeful, but I confess to being irritated by those who are now trying to outline the next 'bull' market.
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