In the City
Lament for equities
Nicholas Davenport
Is the equity dead ? Stockbrokers, trying desperately to cover their expenses, must be wondering whether the business of buying and selling equity shares is not drying up. Turnover has slumped dramatically. In January this year the number of bargains in equity shares on the London stock exchange was 426,546 and the value of all purchases and sales was £1799 million. In August the bargains were 235,761 and the value £866 million—a drop in the latter of over 50 per cent. Last week the turnover was lower still. Yet the big people who buy equity shares— the life assurance companies and pension funds who are the collectors of the national savings—are still in business and going strong. In fact, they are collecting more savings than ever before—probably in excess of £3000 million net a year. Because equity shares are the only security which offers the investor the chance of income growth, the pension fund managers prefer them to any other in spite of the fact that their market values have utterly failed to keep pace with inflation. But at the moment all the institutional fund managers seem to have gone on strike in the equity share markets.
The reason is twofold. First, these institutions have recently had to absorb a plethora of new issues. The Midland Bank recorded £1320 million new equity issues in 1975 and £915 million in the first eight months of 1976 against only £119 million in 1974. (This gives the lie, as I have said, to Mr Jack Jones who has been wrongly accusing the City of not providing industry with new investment money.) The Midland Bank figures do not include Government issues and it must be emphasised that this spate of new equity shares is all the more remarkable when the yield on Government_ lap' stocks is double the yield from equity dividends. The second reason for the equity 'strike' is that the directors of the life and pension funds do not like the look of what is happening to the status of equity shares whose income growth has now been limited to 10 per cent per annum.
It will be recalled that when Mr Heath lost office in early 1974 and the Labour government moved in with an alarmingly socialistic programme the directors of the life and pension funds got into a panic and stopped buying equity shares. They honestly believed that the private enterprise system was on its way out. They only resumed buying when Mr Healey showed, bycoming to the tax reliefof companies in his autumn and April budgets, that the government did not want the private sector to collapse but recover its profitability. The market then rebounded and in fifteen months the index had nearly trebled. It has come down from this year's top of 420 ( May)
because once again the status of the equity share is being attacked.
First the government has just produced a paper on 'Aims and Scope of Company Reports', enlarging upon the company's responsibilities to employees and 'the community' and denying, in effect, the legal proprietorship of the shareholders who own the risk capital. Next, the Bullock Committee on industrial democracy is purporting to recommend either two-tier boards or boards divided class-wise between workers and directors with a neutral chairman and deputy. It is the opinion of everyone with company experience that these so-called reforms would make the whole private enterprise system unworkable. Management was bad enough in the past when the old boys brigade used to run company boards. If we are now to have an addition of old trade union boys in the board room, private enterprise will become a joke. Industrial Britain will be the laughing-stock of Europe.
I cannot see any substantial rise in the market until the proper status of the risk equity has been recognised and restored. It has always been an investment rule of mine that a bull market cannot develop unless there is a conjuncture of favourable politics and favourable economics. This rarely happens. The best example was on the return of the Tories in 1951. The three-year bull market of 1952/55 scored a gain of 117 per cent. The next under Macmillan scored 123 per cent in two years. Under Labour a favourable conjuncture is generally impossible but with devaluation in November 1967 and with Mr Jenkins at the Treasury there was enough to produce a bull market which scored a gain of 83 per cent in two years. Mr Heath did not do better. The favourable conjuncture of politics and economics which his accession to power promised turned sour and after a rise in the FT index of 80 per cent to 545 (May 1972) we entered a period of appallingly bad politics and appallingly bad economics. By the end of 1974 the index had dropped to 147. A 70 per cent fall is the most dramatic slump the market has ever experienced—much worse than in the great depression of the 'thirties. What the City does not seem to realise is that the subsequent recovery from 147 to 420 was not the return of a bull market. There was no conjuncture of favourable economics and politics to support one, It was merely the technical correction of a market panic. Normally a bull market loses from a third to a half of its rise in the succeeding bear phase. If Mr Heath's bull market had lost 50 per cent it would have reacted to 420, not to 147. So the 1976 recovery merely brought the market back to a normal condition.
At the moment of writing with the index just over 350 the market is at a critical point. I am not a chartist but [like to have a chart on my desk which shows two curves— one the monthly moving average of the FT index and the other the twelve months moving average. The monthly moving average is now turning down and the yearly moving average is still going up. If the former does not recover soon it will bring thetwelve months average line down too, which will indicate a bear market. What are the chances of the monthly average curve moving up?
Not very great. A conjuncture of favourable economics and politics is not impossible but remains very uncertain. As regards economics the National Institute of Economics and Social Research is not very optimistic in its latest Bulletin in spite of the world economic recovery. It sees unemploYment still rising and not falling below 1.2 million before the end of 1977. It does not see inflation falling below 10 per cent before the end of 1977. It sees the deficit on the balance of payments worsening this year. Exports will rise but there will be negative growth for the average Briton. In a special study on output and productivity the Institrue reveals that the British worker has now the worst productivity record of any country in Europe except in the field of agriculture.
As regards politics, Mr Callaghan is a great improvement for the market on Sir Harold. His word is trusted by the trade union leaders and while he remains on toP the social contract will survive. But there will be some awkward moments in the coming party conference. As far as the equity market is concerned its mood will depend much more on seeing the moderate shop stewards take control of the shop floor and agree new productivity targets with the management than on seeing .trade unit:it; bosses in the boardrooms. Indeed, it is vita' to keep union hacks out of over-all management. I would rather see them sitting ot,1 the pension fund boards and giving their support to the purchase of the many equitY shares which are not only giving good dividend yields but are selling at well below their net asset values.
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