Your money on the Stock Exchange
Nicholas Davenport
There is such a bad-tempered bear market running in the City that when that wondrous Knight Weinstock raised the pre-tax profits of his great conglomerate GEC by 55 per cent for the year ending in March — the gain was 35 per cent in the first six months and 70 per cent in the second on a turnover only 5 per cent higher — the shares went up and down just 2p. It is really the bitch of a market to ignore the fact that the current year should see an upsurge in GEC turnover and a further jump in profits. At the present price the shares at 137 are selling on a price-earnings ratio of only 12+.
The FT ' thirty ' index is now down 20 per cent from its double top in 1972 and the thirty shares are selling on an average priceearnings ratio of 15. In view of the fact that Mr Heath may call an election in the next six to nine months and add to our uncertainties — or in view of the fact that if he stays in office with Labour consent he will screw down prices so that the profitability of British industry will be seriously undermined — the possibility must be faced that the equity market may be driven to still lower levels, so that the good industrial shares will be selling on an average price earnings ratio of 6 to 8, as they have recently in Wall Street.
The fact that £70 million has been lopped off the market valuation of GEC and that since March, according to the new :Stock Exchange valuation, £15,000 million has beer) lopped off the market valuation of all equity shares, provides me with a good opportunity to give a short lecture to Mr Denis Healey and his Marxist boys who want "a massive extension of public ownership." Their declared plan is to take over or to use their words "establish comprehensive planning control over" the hundred largest British companies listed on the Stock Exchange. The Council has conveniently just published a market valuation of the equities of these marked hundred as at March 30. It comes to over £29,000 million and it accounts for 57 per cent of the total valuation of all equity shares. The expropriated shareholders will not look forward to receiving £29,000 million worth of government paper as compensation. There is no doubt that if Mr Healey were Chancellor of the Exchequer the market value of that compensation paper would be depreciating very rapidly, for the nominal value of the stock to be issued would be 50 per cent more than the market value of all the existing government bonds quoted on the exchange.
I think it is right and proper for the public to know the names of the hundred largest companies valued in March at £39,000 million, which Mr Healey and his friends wish to take over (see box below).
The disintegration of the £29,000 million worth of equity shares will not just upset the capitalist rich. It will upset the value of all pension funds, life assurance funds, unit trust funds, trustee savings banks, investment and other trusts, and the rest of the bodies collecting the people's savings which account for much more than half the total. The notwell-off middle class, the widows and the orphans, the workers in the Trades Union Unit Trust and the small savers who have taken Out life assurance linked with unit trusts will all suffer, watching the disappearance of the market value of their life savings.
The Marxist nationalisers seem to suffer from the delusion that it is easy to get rich by buying shares and playing the Stock Exchange like a casino. It is already been proved that equity shares are no inflation hedge. In the previous bear market which lasted from January 1969 to March 1971 the cost of living rose by 12+ per cent while shares, measured by the FT ' thirty ' index, fell by 41+ per cent. So far, under Mr Heath the rise in shares, like the rise in wages, has bettered the rise in prices, but it is too early to say how it will end. Anyway, the' cult of the .equity 'has long been exploded. To make money on the Stock Exchange you have to exploit both the bull and bear markets which is not easy. A bull market , has to have the rare conjuncture of a favourable political and a favourable economic climate. There have only been two such fine strokes of luck since the war. The first was on the return of the Tories and lasted three years and one month — from June 1952 to July 1955. The second was from February 1958 to January 1960 and lasted just under two years. The first saw equity shares rise by 117+ per cent and the second by 122 per cent. Thereafter there was a long miserable period of ups and downs — a bear market of eleven months, a bull market of five months and a bear market of thirteen months. It was not until the bull market of 1962/64, which lasted two years and three months, that investors who entered the market at the top in 1960 saw their money. back. This bull market scored an advance of only 49+ per cent. Then came another miserable period of ups and downs — a bear market of eight months, a bull market of eleven months, a bear market of five months. Finally the great Wilsoncum-devaluation bull market which lasted two years and two months — from November 1966 to January 1969. This scored a gain of 83 per cent but more than half of it was wiped away in the bear market which ended March 1971. As I have remarked, it is too early to say, if the short bull market under' Mr Heath will offset inflation for the investor, This is all very well, you may say, but you cannot deny that some lucky people have made fortunes out of shares. Certainly they have, but most have done it by working hard in building up a fine business and then floating it on the market and cashing in. These enterpreneurs who have created employment and wealth for the nation deserve to enjoy their profit. But there are also some people who have made fortunes out of share dealings. These are few and far between. Jim Slater is the archetype but Jim happens to be a bit of a genius. He has just published a remarkable letter explaining why he withdrew from the proposed merger with Hill Samuel and promising in future to divulge and dissect all his profits. In 1972 he made for Slater Walker Securities no less than £9.2 million out of 'investment dealing ' of which he has transferred £5.3 million to 'inner reserves.' Of the £9.2 million £2.7 million arose from supplying the initial portfolios for Slater Walker Dual Trust and SW Overseas. He virtually admits that he cannot do this again. The climate has changed. Shares, thanks to Captain Healey and his pirate crew, have become unfashionable and unloved. Even clever Jim Slater's shares have sunk to 170 — near their asset value — from 284 this year.
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