In the City
The markets point ahead
To Rudd Just when 364 economists have apparently °Pined that Mrs Thatcher's government has got it all wrong (just one more opinion and it w0111d have been possible to construct a flew ew Economists diary with a separate opinion for each day!) the market is saying that she has got it exactly right. The level of share prices is now nearing its best for two Years and is once again bumping against the ceiling through which it has failed to rise on so', many occasions in the past. Market ouservers are agog to see whether this time it will succeed because, if it does, most believe that it will go into new high ground, whieh, in terms of the Financial Times 30-share index, means over 600 — an exciting Prospect. Opinion is divided as to whose euphoria is causing the buying; some say it's the sm nGI I 11 ; man, others think that it is the large investors. In a way it's academic because either one usually follows the other. Institutional fund managers can't bear to be left out of a rising trend but the small man is usually sucked in by what he reads in the newspapers. • IS Where opinion is more seriously divided on the question whether the rise is well .„.,uased and will therefore be well sustained. ihere are plenty who argue that it is and will not be so. For what is so obvious to all at the moment is the width of the gap between the Promise of better things to come and the actual arrival of those better times. Cert,LatnlY there is evidence that in some parts of l'oe economy conditions have ceased to deteriorate. There are even signs that the rundovvn of stocks is slowing up. But the actual results being reported by companies ,rtheemraein, by and large, horrific. And even if is a slow turning for the better during 1.981 this in itself will hardly produce better 'gores for the year in question. In other words the companies reporting now on 1980 will still, in a year's time, be reporting on pretty awful conditions in 1981. It will Only be in 1982 that the improvements affect earnings and therefore we shall have to wait until 1983 before company results reflect the improvement. Two years is quite a long time, even for a business cycle to Yield its fruits. On the other hand the optimists argue !oat the improvement, when it comes, will be startling. This is the obverse side of the unpleasant likelihood that unemployment Will Yield very little to the coming rise in utput. Instead business will try to cope on tts present level of manning and will hope to improve productivity and thus profitability at the expense of employment. This may .sOund a rather grim policy but so often in tne past labour has been sucked back into the productive process as fast as, if not fas ter than, output has risen so that periods of recovery have produced somewhat disappointing results. This time there is a clear determination on the part of management to avoid this mistake. Indeed some managements have undoubtedly used the general economic depression to achieve a streamlining of their processes which in more buoyant times they would never have been able to ram through. But it is also the case that during this recession there has been a great deal of structural change (which may be the same thing except on an industry level rather than a particular firm's horizon). Thus the heavy industries like steel and heavy engineering will not reexpand to the levels at which they once operated, let alone to the levels which they once planned to achieve in the future. Some of these potential sponges for labour have therefore been permanently destroyed.
Great though the rise in productivity and therefore of profitability may be, particularly in the favoured industries, during 1982 and 1983, there are still questions which hang over the outlook. First is the obvious one that the future improvement is being discounted too early by the market now and that investors are consequently quite likely to be disappointed again before the great new bull market really gets underway. It may also be that the somewhat undiscerning Way in which many leading shares have risen irrespective of the industry in which they operate will also cause disappointment in that the coming recovery will not assume anything like the shape of recoveries which we have seen in the past. It is bound, for the reasons stated, to be more narrowly based.
The second doubt which the market will have to overcome if any recovery is to be sustained is the political one. It is all very well for productivity and profitability to rise and for unemployment to remain roughly where it is. In economic terms that may well make considerable sense until, that is, the economy can really be made to expand as distinct from merely recover from an appalling recession. But in political terms this is not going to be very good news. It may be argued that people get inured to unemployment, as they did in the Thirties, and that in political terms it is not an issue. That is a very robust view to take. After all, the unemployment of the Thirties cost the Conservatives the 1945 election and if Rab Butler had not re-invented the post-war Conservative Party it would have continued to keep them out of office. The same principle probably applies now. Although the hardship of unemployment is much less than it was in the Thirties, the hopelessness of it still remains. And although the next election may well be called in the middle, if not at the peak, of the coming rise in economic activity, the general prosperity may not be sufficiently thickly spread over the electorate to eradicate the memories of what they have just been through and will, many of them, still be going through.
The point about this latter conjecture is not that it is possible to make up one's mind one way or the other at this juncture about the point, but rather that the issue is clearly going to present itself to investors. As the date of the next election begins to become a market factor, small investors and fund managers of institutions alike are going to begin to worry about whether Mrs Thatcher is going to win this time. 'In the past it has often been the case that a Labour government has been just as good for the market as has a Conservative. But a government under Mr Michael Foot and dancing to the tune of Mr Tony Benn? One wonders.
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