FINANCE AND INVESTMENT
By NICHOLAS DAVENPORT IP I write this week about the pulse of the security markets it is not because I wish to sound any alarm or air any unpopular opinions. I am merely making an objective report.' When Mr. Hugh Gaitskell was in high office the Stock Exchange suffered from a chronic low blood pressure. Today it is back in normal health—with double the daily turnover of bargains—and' the mood is bullish. In fact, when the bull movement in ordinary shares occasionally gets out of hand there are symptons even of a return of the high blood pressure prevalent in the days of Dr. Dalton. This invariably induces Dr. Butler to administer a sedative. He did so in the House of Commons last week when he damped down the expectations of a much easier Budget. And it is possible that he is postponing a further cut in Bank rate (which is overdue) lest this medicine should have too stimulating an effect upon the excited patient in Throgmorton Street. I do not know whether the Chan- cellor looks every day at the Financial Times index of industrial ordinary shares, but he would find that it has risen this year by about 15 per cent. and since June, 1952, by nearly 30 per cent. It touched last week 131,5—it is slightly below that as I write— and has only to rise another 10 per cent. to break through the peak (140.6) of the Dalton boom of 1947. Perhaps that is what is frightening Mr. Butler. He may have been momentarily scared this week lest the first denationalised steel issue so success- fully launched, should be the occasion of an unseemly boom. Happily, the many " stags " of United Steel were disappointed by the opening premium of 4id. The Amal- gamated Engineers, with their threat of guerilla strikes, checked the market and rescued the Chancellor from what might have been a compromising situation.
Raison D'Etre of the Equity Share Boom But the prospect of easier money or an easier Budget is not the only stimulant for the market in industrial equities. There have been enough good company reports, enough dividend increases and free bonus share issues, , to keep the bull market boiling. Many companies have not waited for profits to rise or taxes to fall before increasing their cash distributions to shareholders. Now that dividend policy is no longer under political restraint directors generally have become more generous. They have some- times felt compelled to distribute more in cash, or bring their share capital into line with reality, lest outside interests should make an attractive bid for their shares and get control of their company. All this explains and justifies the recovery in British industrial equities this year although Wall Street has been falling. But the market is not apparently content to restore the old status of the equity share which Mr. Gait- skell had reduced. It seems determined to discount the further increase in dividends and the further bonus share issues which it expects to follow on the 1953 recovery in trade. This will not begin to be reflected in company reports until February or March of next year. There have been two suggestive features of this year's recovery in produc- tion and employment. Exports may have lagged but more of the national production has gone into the domestic trade on which profit margins are usually higher. Further, the terms of trade have been so favourable that companies have been able to buy—and stock up—imported raw materials at con- siderably less cost, so that their cash position has been improved. The market has not been slow to fasten on this bullish point— that improved liquidity in a good trading year invariably leads to higher dividends, especially when no Excess Profits Levy is payable.
Criticism of the Boom My criticism of the boom in industrial equities is threefold. First, it has not yet taken into account the possibility of an American recession. Even a mild drop in America's production and employment can lead to a sizable cut inb our exports, which would immediately upset our somewhat precarious balance of payments. At the moment there are signs of an orderly reces- sion in the durable goods trades in the United States but it is too early to say how far it will spread. Secondly, the boom has been too undiscriminating for my taste. The recovery in production this year has not been evenly spread over the whole of industry. There has been a decline in the output of the engineering and metal trades —with the exception of vehicles and plant for civil engineering. There has also been a' reduction in prat margins in the export trades which have become much more competitive. But in the share markets the industrial groups have risen broadly by the' same proportions.
Dangers of the Bids My third criticism is that take-over bids and rumours of bids have in some markets, taken the bull movement out of City profes,.., sional hands into " West End " specia- lators' hands. Probably there has been some abuse of Stock Exchange facilities. The Stock Exchange Council, which is I responsible for the freedom of a public market in capital stock, cannot lightly, suspend dealings in shares, but I suggest, that the directors of companies concerned should themselves take more frequent action either by making public immediately, the results of their enquiries into the genuine= ' ness of bids they have received or asking the Board of Trade to make an official investk gation. I am glad to see that the directors of the Savoy Hotel have asked the Board of Trade to enquire into the ownership of newly acquired Savoy shares registered in, the names of Bank nominees. Could not the directors of Union Castle have done the same thing about the buying of their shares ? Finally as a result of extraordinary bids. and inspired buying the market in store shares has risen this year by nearly 75 per cent. That surely is a danger signal.
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