In the City
Pair for equities
Nicholas Davenport
The talk in the City this week was that the election would be postponed until 1979. The Old Boys, who claim Close contacts in Westminster, have been saying that a father-figure like the present prime minister would not dare to appeal to decent homes with lace curtains in the Thorpe while a disturbing case like the ,thurPe affair is being argued in the Courts. Nothing is more calculated to make the average voter stay at home, theysaY, and show his dislike or contempt for Parliament. Especially as the sanctions busting affair in Rhodesia comes on top. All this could mean a certain defeat for Labour. So, with continuing support from Mr Steel made certain, Mr Callaghan could soldier on in the Commons and risk only the bad figures Coming out from the inflation indices. v'ncl if they began to look too bad he could always order the Statistical Office tc° compile a new index which would contuse everyone except a few sharp eyes in the City. That is how the Old Boys were talking this week. What is wanted urgently is a more reliable set of indices for output and pro duct fl/it At present these indices are very unreliable but they are often quoted Which .the Chancellor as proof of growth, )tich they are not. It was good to see that his colleague, Mr Joel Barnett, the "hnlef secretary of the Treasury, brought curie to an audience in his constituency last week the awfulness of British output and productivity. In 1955 our proeiuctivity, he said was 15 per cent above that of France and Germany, but by 1973 49ernlanY was 73 per cent and France was Per cent ahead of us in the prot!uctivity league. The reason, of course, is that British trade unions have always e sisted the introduction of work-saving machines and insisted on an absurd degree of over-manning. The result is that unit labour costs in the U.K. have increased at a much faster rate than those in competitive countries, namely — quote from the Under-Secretary of State at the Department of Trade — at an annual average of 7.1 per cent over the decade to 1974 compared with 5.8 per cent in Japan, 5.5 per cent in West Germany, 4.7 per cent in France and only 2.7 per cent in the USA. So ridiculous is the over-manning in Fleet Street that it is only a matter of time before the managements are forced to close down the printing of daily papers in the City. Mr Barnett, being a kind man — he always presents the picture of an amiable grocer in the High Street — suggested that fears of unemployment were responsible for this Luddite behaviour. But he assured his audience that these fears were groundless. Improvement in productivity, he rightly said, would mean more, not fewer, jobs, for it would then be possible to sell more goods in competition with those coming from abroad. This would break the vicious circle we have been caught in for too long — poor productivity, a declining share of world trade and a declining number of jobs. Has the prime minister the courage to tell these home-truths to the ravenous men assembled in the Trade Union Congress this week who are determined to break Government guide-lines on pay? Has he the guts to say — in the words of The Times last Saturday — that the trade union system in Britain actually stands in the way of improving productivity, lessening unemployment and creating wealth? If Mr Callaghan were a thunderer he would say to the union bosses: 'You are not doing your job. You exist to make your members richer but you make them poorer. You exist to protect jobs but you destroy jobs. For God's sake get out of our way'. But alas Mr Callaghan is no thunderer but a compromiser, one who papers over the cracks, and he will no doubt gloss over the frightfulness of Trade Union obstinacy and pigheadedness in the productivity problem.
But do not let this depressing Congress put you off buying equity shares on the Stock Exchange. The present dip in the market presents a good opportunity. There are plenty of companies whose managers have come to terms with their work force and have secured a reasonable productivity response. It would, of course, be more widespread if the work force were given a slice of the equity, so that they can look forward to a rising dividend income from productivity gains.
There is a general rise in equity shares fomenting in the main bourses of the capitalist countries. It may be explained partly as a recovery from the inflation disaster brought on by the Arab oil crisis of October 1973, which quadrupled the price of oil, and partly as a flight from the paper dollar. Equity shares, as we know to our cost, are no perfect hedge against inflation. On only two bourses — Hong Kong and West Germany — have shares actually risen sufficiently high to off-set the price inflation which followed the crisis of October 1973. According to The Economist equity shares quoted in London, Amsterdam and Paris would have to rise between 75 per cent and 90 per cent to offset the ravage of inflation.
In Throgmorton Street an average price-earnings ratio at present of 8,29 suggests that equity shares are comparatively cheap. In bull markets of the past this ratio has gone up to 20 and over. The average dividend yield of 5.36 per cent is also enticing. If Mrs Thatcher IS given power the first act of the Tory government would be to remove the dividend control, which means that the average dividend yield would before long be doubled. So let the investor take heart. But he must be choosy and lay down certain rules. First. confine himself to the companies whose managements have come to terms with their work-force and have secured a reasonable productivity response. Second, give pre ference to the companies exploiting technological advances. It is worth comment that the companies manufacturing electrical components, which can be used in work-saving devices, have recently reported profits which are 50 per cent to 70 per cent ahead of previous reports. Even trading companies, if well managed, are looking for profit rises of 20 per cent or more this year if they are parties to the consumer boom which the Labour government has engineered (through tax reliefs) for the sake of the coming. if late -com ing, election.
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