In the City

No bull market yet

Nicholas Davenport

It has been my constant cry to investors not to regard the recovery in equity shares as the start of a new bull market until there is a conjuncture of really favourable politics and favourable economics. The FT index was trying to break through the 420 high point of May 1976 and on 3 February it touched 406 —only to fall back to 366 this week on bad trade figures and shouts from 4,000 Leyland car workers that pay restraint must end. In point of fact there has been a slight —but very slight—favourable turn in both politics and economics, but not yet enough to justify a bull market.

In the first place, Mr Callaghan is politically a great improvement on his predecessor who allowed the extreme Left to take over the Labour Party on his electoral defeat in 1970. Mr Callaghan has not been strong enough to get rid of the Marxists in his government but he has made it clear where he himself stands--a moderate socialist believing in a mixed economy and anxious to see the private sector prosper, export more, invest more and make more profit. A test of his political pragmatism comes up with the implementation of the Bullock Committee on industrial democracy. As Mr Brian Crozier said in an important letter to the Spectator last week, if Mr Callaghan sides with M r Jack Jones and the Bullock majority report he will hand over the private sector to those committed to its destruction: he will guarantee the continued stagnation of our industrial performance and hence our economic decline. But I believe that Mr Callaghan will try to steer Mr Jones towards the German system of supervisory boards, the workers on the shop floor electing half the supervisory but not the managing board. Whether this pis aller would be acceptable to the CBI I do not know but it would enhance Mr Callaghan's political reputation in the City as a political moderate. A plus mark for the political factor.

As regards economics, the recovery in world trade hangs fire, especially in Europe, and it appears that the US is the only major power prepared to inject a reflationary boost to their economy. Wall Street, which is falling, needs it badly. Meanwhile our Overseas trade figures, badly distorted last month, show little improvement even when averaged over three monthly periods.

A more important economic signal for the market is that the public sector borrowing requirement for 1976-77 appears to have been greatly overestimated. Instead of the last official figure of £11,200 million, a final out turn of £9,500 million to £10,000 million is more likely. This will make it easier for the Chancellor to make tax concessions in his budget which in turn will make it easier for the Government and the TUC to reach a compromise over the next round of pay restraint. I don't agree with Messels that there is any danger that monetary restraint will be abandoned in order to preserve the Social Contract. Some form of social contract—more flexible, less rigid—seems a certain event if you can believe Mr Healey.

Just when Mr Callaghan has been telling the Commons that a third phase of pay restraint is inevitable and that a failure to agree upon it would mean a vastly increased rate of inflation, my friend Samuel Brittan publishes a new book written in conjunction with Peter Lilley on The Delusion of an Incomes Policy. I get very cross with distinguished economists who refuse to take into account the psychological factor. They can prove that an annual incomes policy has little relevance to the actual rate of inflation in the year following for that is largely determined by the floating rate of exchange, but they cannot deny that an incomes policy which is agreed upon after friendly negotiation has a different effect upon the workers' pysche than an incomes policy which has

been either politically forced or morally rejected. The first makes them reasonable people; the second makes them mad and unreasonable. When the 'immoral' statutory controls on wages came to an end in July 1974 earnings jumped by 14 per cent in the following six months—at an annual rate of 30 per cent. What is making Mr Callaghan and Mr Healey nervous is that if there is not another voluntary and friendly agreement there will be a mad wage explosion.

Of course, the two years of flat pay restraint have set up strains over differentials —Samuel Brittan is quite right in arguing that an incomes policy is bound to fail after a year or two for this sort of reason—but the Government and the TUC are already both agreed that there must now be more flexibility, that there must be adjustments for differentials, that is, bigger rate rises for the more skilled, and they are likely to accept the motor-car workers' demand that pro ductivity increases must be taken into account. So it is not impossible that after the budget with its tax reliefs of £1,000 million or more and after some months of bargaining there will be another sensible compromise on pay restraint as well as a sensible com promise on Bullock extremism. That will be the time to re-examine the case for a bull market in equities.

What I cannot understand about these pay negotiations is why the trade union leaders have not introduced the subject Of profit-sharing. As I have said `workers participation' in France means a share in profits. It seems ludicrous to me that workers can be expected to accept flat rate increases in wages below the expected inflation rate and increase their productivity at the same time without being offered a share in the profits resulting from it. How long are we going to assume the nonsense that because

the Labour Party was constituted to destroY capitalism the workers must never be allowed a share in profits while they last ?

The question which calls for a committee of inquiry is not how to give a seat on the board for workers—anyone who has met

Clive Jenkins would know that a clever argumentative worker of his kidney on t.11e board would hold up vital decisions in

definitely—but how to give them a share in profits for working the labour-saving machines which create the redundancies. I have down the years argued for worker participation in a public unit trust. I bring LIP

this idea again because there is a new opportunity to launch a public fund owning the leading equity shares in British industry through a take-over of some investment trusts. This market of some £6,000

million

has been a problem in the City for a long time—the shares standing at large discounts and no one willing to buy. Lately there has been a sharp rally in the shares and various attempts at take-overs and mergers ate. being made. Unitisation is also being talked about by one managing house. What better than a unitisation of the whole lot through a take-over by the Government for the Put' pose of launching a public unit trust ?