Farewell to the bull market
MONEY
NICHOLAS DAVENPORT
A stock market feeds on rumour. Particularly rumours of takeover bids, however improbable. A week or so ago there was the rumour of the giant Shell taking over the giant British Leyland Motor. This, I thought, was the most improb- able ever invented and could only have been thought up by a writer of science fiction. But it put up the shares of British Leyland Motor by Is to 15s 74d. On the other hand, mere political rumours rarely do a market good. The recent slump in the gilt-edged market was not caused by the silly rumour of resignations at No. 10 and No. 11, but by technical money rumours— equally silly—which I exploded last week. What was significant was that the political rumour which ran round the City for a few mad hours left the market in equity shares, normally the most sensitive; completely unruffled. Usually any report, however flimsy, that the Prime Minister might be contemplating resignation Would have sent the wicked speculators rushing into the market to buy the 'leaders.'
This confirms the view, expressed in this column on 11 October, that the great 'bull' mar- ket is over. It,'lasted nearly two years, which is normal for a irnajor uplift. It was in September that I first protested against the then absurdly high level of equity share prices on the London stock exchange and it was in that month that the 'high' was reached, namely 521.9 for the Financial Times index of industrial shares. The rise from start to finish was 80 per cent. Since then it fell to 475 and has recovered to 493. Most brokers believe that it will fluctuate be- tween 450 and 520 for a considerable time, but I think that it may go lower than 450 for the following reasons.
First, the Chancellor has imposed the greatest tax levy of all time. The March budget exacted nearly £1,000 million and the 'mini-budget' last month about £250 million. People are going to be very short of cash in the New Year and the best way to restore liquidity is to sell shares in the market. This will have to be done by many people who must pay the special charge on in- vestment income—a capital levy—which starts at 2s in the £ on investment incomes of £3,000 and rises to 9s in the £ on investment incomes of over £8,000. Then there is the relentless pres- sure of the bank managers. The orders which have gone out to cut down personal overdrafts will be worked out in a dribble of sales in the market.
Next, can the unit trusts go on gathering in the savings of the middle class at the 1968 rate? In a few years they have brought up the total inflow from about £120 million to £220 million a year. The middle class is likely to feel the Chancellor's pinch more than any other section of the community. And these were not all real savings. There has been a lot of switching from conventional life assurance to unit trusts linked with life assurance. I suspect that the unit trust movement will be slowing down in the first half of 1969. It was the steady buying of the unit trusts which was the mainstay of the bull market.
Further, the aggressive buying of the unit trusts fell upon a market which was ill-supplied with shares for the first twelve months. But this technical shortage of supply has been elimin- ated .this year by the substantial increase in 'rights' issues, which have been at an annual rate of over £300 million against only £74 million in 1967. This has been more than enough to meet the demand of the unit trusts. Hence the end of the 1966/68 'bull' market.
I am not suggesting that the market will break badly. There is still a great fear of inflation which will drive many people to convert their savings from fixed deposits and the Trustee Savings banks into equity shares. But the vol- ume of this funk money will not be adequate to bring the 'bull' market back into life unless the great life and pension funds decide to- re- sume buying. At the moment they are more likely to re-enter the depressed gilt-edged mar- ket. They will not be heavy buyers of equities until they see more reasonably priced shares. On the Financial Times industrial average there is a 'reverse' yield gap of 41 per cent. That is, equity shares are only yielding 31 per cent against 8 per cent on government long-dated bonds. On the 'growth' equity shares the reverse yield gap is as much as 51 per cent. Of course, an investment institution does not buy an equity on a dividend yield basis but on its earnings potential. The average earnings yield is today 4.7 per cent. Allowing for an average rise in company profits this year of 20 per cent the potential earnings yield would be 5.6 per cent. But can this rate of growth be relied upon? Professor Ball of the London Business School has been forecasting industrial profits for a well-known firm of brokers and has estimated that the rate of growth next year will slow down to about half the 1968 rate. His estimates were probably underwritten at Chequers last week- end when the cal and trade union leaders were persuaded by the Prime Minister to accept a national growth rate of 3 per cent for 1969 against the 1968 rate of 4 per cent and the TUC forecast of 6 per cent. It is, alas, government policy to slow down growth until a surplus on the balance of payments is realised. And Mr Jenkins has certainly done his best to bring it about.
There will be many excellent company man- agements who will succeed in beating the slow- down and boosting their profits. The unit trusts, who have at the moment plenty of cash to invest, will no doubt be trying hard to find the 1969 winners. But before the investor gets too excited about this prospect he should review the winners and losers of 1968, which I hope to do next week.
Finally, may I correct a misprint in my article last week? The £14 million drop in small savings referred to a period of seven days and not seven months.
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