The City and the Crisis
By NICHOLAS DAVENPORT
WHEN we read that the stock markets suffered on Monday their worst day since the Cuba crisis—the Financial Times index of industrial shares falling seven points or ° 24 per cent—we must not 0 imagine that the investing `z public had suddenly con-
e. V' ceded an early election to a ° Mr. Harold Wilson. What
happened was that the jobbers came back to work in a sour and realistic mood--who can blame them after reading the Sunday press?-- and were determined to get back some `cheap' stock on their books by marking down their prices heavily and frightening brokers (or rather their clients) intd a sale. That is how the job- bing system works and by and large it helps to make this the freest capital market in Europe. The steep rise in equity shares since the end of January—over 10 per cent—had left the jobbers extremely short of stock and a political crisis of the Profumo sort gave them a wonderful oPportunity to replenish their books. I do not believe, however, that a great volume of selling resulted. A few hardy professionals (who are taxed as traders) may have sold short, which is a Potential source of strength to a market, but the City is not yet convinced that that old Political fox the Prime Minister cannot escape the trap into which he has run. And here is nother sobering thought. The City is predom- Tandy on the Tory `right-----the liberals here are I'VV and far between—and much as they may dis- like Mr. Macmillan, whose usefulness ended When he failed to get them into the Common Market, they are not going to support any move- ment to exchange him for Mr. Butler, who, they say, has been busy giving Africa away and is not to be trusted. They arc therefore assuming that the election will be held when Mr. Macmillan Wants it, which is presumably the spring or autumn of 1964. To help the market recover its balance and allow those who have been buying equity shares this year to feel that there are solid grounds for their optimism Mr. Maudling as been making a reassuring speech to the Rotarians at Birmingham. There is now, he says, a great deal of evidence to show that the domestic economy is expanding; there are also signs that World trade is improving; certainly in the United States there is now faster growth. Well, I have argued before that Mr. Maudling's view of re- expansion is extremely cautious. How many People realise that in spite of the tax rebates this Year he is taking £49 million more from tax- Payers' pockets than Mr. Selwyn Lloyd did in 1962/63? But he persists in his belief that the Measures he has taken in the field of private con- suMption will have their effect and will 'spread ck along the line to the capital goods indus- tries: The time this will take, he says, is difficult I.° estimate precisely and will vary between one indilstrY and another, but he claims that the overnment is doing all it can to help capital !oods industries both by increasing public in- esbnent and by special measures (i.e. the im- iProvement in capital allowances and the aid .° the shipbuilding industry) It seems that there 1,-1, something of a conflict between Mr. 1,,:,.audling's favourable economic forces which Ikouln Push the general election into the latest Possible time in 1964 and the adverse political
forces gathering round Mr. Macmillan which could push him into a resignation this year.
It is perhaps significant that Mr. Maudling did not refer in his Birmingham speech to the document published by NEDC on export trends giving the full reasons why they thought that exports could be increased by at least 5 per cent a year from now on. Is he sceptical of this fore- cast? In the first four months of 1963 exports were only 2 per cent higher than in the last quarter of 1962 and 3 per cent higher than the 1962 average. It would be surprising to see them rise by more than 5 per cent for the rest of the year. 'If all plans and forecasts made by governments and international organisations were fulfilled,' says the NEDC, `world exports of manufactures might grow by about 5 per cent annually from 1961 to 1966.' But how often are official plans and forecasts realised? And how often does the UK do better than the world outside? The revealing feature of this NEDC document is the doubt openly cast in the last paragraph on our ability to achieve the export target. The required expansion in our exports,' it says, `may not be forthcoming unless prices on the home market fall relatively to foreign export prices of manufactures. At the least the past relative increase in home prices of. over 1 per cent a year must be eliminated.' To prove that relative changes in costs and prices do have a substantial effect on exports the NEDC cites the case of France. From 1955 to 1957 her exports stopped expanding and her share of the world trade in manufactures fell. In late 1957 she took various measures which effectively de- valued the franc by about 10 per cent and at the end of 1958 there was another devaluation of some 15 per cent. From the second half of 1958 onwards the volume of her exports rose sharply—as did her share in the world exports of manufacturers. Later, as French costs and export prices rose faster than in other countries, he, share in the world trade fell back. This is a.; near as the NEDC dare go in recommending the Government to devalue sterling if it wishes to achieve its export target.
Nevertheless, even if exports tail to hit the target, even -if Mr. Maudling's re-expansion is slow, there should he a sufficient growth in tla. home market to bring about a sharp turn- round in industrial profits as compared with those during Mr. Selwyn Lloyd's freeze. I see that Professor Victor Morgan reporting to a firm of stockbrokers agrees firmly with this view. The recovery of 1952-55 raised company profits, he said, by nearly 30 per cent and that of 1958-60 by 20 per cent. From the low point in 1962 there has already been a recovery of 5 per cent and he confidently expects that this recovery will go on for eighteen months, so that 1964 profits should be 20 per cent to 25 per cent above the 1962 levels. This is the hope which is sustaining the stock markets in the present political crisis. Bot how much more confident would the City be if it felt that the Prime Minister was really in control of domestic events instead of the reverse! Far too long it has been listening to an orchestra whose conductor has been strolling in the wings while some of the players—NEDC and NIC—have been blaring different tunes. And now—of all things—the war-drum player has been making eyes at a naughty girl in the audience! Could the conductor not return to the rostrum and start directing his finale?
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