Marching to 300

Nicholas Davenport

As the "'public amazement at the stock market 'boom' seems to grow week by week I must continue my technical comment even if my approval of it offends the puritans Who hate to see money being made out of money.

To recapitulate: the slump in equity shares had been carried to an abnormal and absurd extent — Index down 73 per cent from 543 to 146 — because the City fathers, the managers of the life and pension funds, had concluded from the Labour party's socialist manifesto that the capitalist system was doomed. So they got into a panic, stopped buying equity shares and took refuge in short-dated 'gilts' and seven-day money. When it dawned on them that Mr Wilson and Mr Healey had no intention of wrecking the capitalist system, but °II the contrary were taking steps to keep it alive and even kicking,

eY suddenly reversed their posi

took £1,000 million off "the street" and bought the leading equity shares. But there was no stock on offer. The jobbers were caught short; the bears were slaughtered. And in a few weeks the index gained a hundred points. MY appraisal was that as a normal "bear" market — without a panic — would have carried the index down tO only 350, or 300 at the worst, the index would return to that sort of level as confidence began to grow. At the moment of writing it is 277. The action taken by the Governrent which convinced the City

fathers that it did not want to see the capitalist system or the private sector collapse was first, the Chan

,e.ellor coming to the rescue of the liquidity crisis by relieving com

Panies of tax on their stock-infla

tion profit and easing the pricecontrols; secondly, the Minister of

the Environment coming to the aid

of the banks and property comParlies by unfreezing commercial rents; third, the lifting of the dividend restraint from 5 per cent t° 121/2 per cent. _There is a strong feeling in the ‘-ttY that dividend limitation is g°ing to be lifted altogether. The g_overnment has at last realised that 11°111Panies will not be able to raise °IleY on the capital market for tlillvestnnent in factories and plant if eY cannot show the investment istitutions a decent dividend yield °teill their money. The F.F.1. has been lifling them this fact of financial „es for some time. Incidentally, the million raised so successfully by

the F.F.I. from the institutions because of Mr Lever's intervention is not going to be used to finance companies driven into bankruptcy by unreasonable wage demands and strikes. That undertaking is what the recent speeches of the PM and the Chancellor implied.

Mr Healey's speeches in particular have been responsible for the return of such confidence in the City. On February 8 in an interview with Radio Leeds he said that the minority of unions who had secured wage rises outside the TUC guide-lines is large enough to threaten Britain with mass unemployment. These were strong words. And at the annual dinner of the Electrical Contractors Association on February 11 he went further. He said that our rate of inflation is already higher than that of most of our competitors and that unless we can narrow the gap this year we are in trouble: Britain could be bankrupt if the national wage bill was too high this year.

Words of this traditionally conservative tone were taken in the City as proof that Mr Healey, the strong man in the Cabinet, is moving the government towards a centre nationalist line against the wild Marxist Left. It could be said that the Chancellor was even underwriting the current "bull" market on the Stock Exchange.

If the City had been better informed about Labour party politics it might have avoided its panicky despair about the future of the capitalist system. When Mr ' Wilson lost office in 1970 he went through a period of despair himself and allowed the Marxist Left to walk over his prostrate body and impose a Clause 4 socialist threat in the election manifesto. Back in office as prime minister, which has restored his soul, he is once again in his old form as a social democrat. He never had any intention of destroying the capitalist system and obliterating the private sector. This may explain why he is reported to have listened to the wails of the CBI on the Industry Bill with amazement when they met at No 10 last week. The President of the CBI told him that the Bill was a charter for workers' control and for the erosion of the private sector, that it gave arbitrary powers to Mr Benn to intervene in profitable companies and to force disclosure of vital information to trade union officials who might be harbouring a deadly communist agent. Mr Wil

son was astonished. He said Mr Benn could not intervene without consent and that the Bill must not contravene the white paper on The Regeneration of British Industry. Clearly this is another case of hasty ill-thought out legislation — like the CTT clauses of the Finance Bill — and calls for revision by a social democrat Prime Minister. It also calls for some compromise on the part of the CBI which, I am sure, is negotiable. If Mr Wilson had really intended to let Mr Benn loose to destroy the private sector he would not have appointed Sir Don Ryder to head the National Enterprise Board with offices outside Mr Benn's purview, For the moment the market is ignoring Mr Benn and very properly taking its cue from "Gauleiter" Healey. His next budget is not expected to be reflationary but conservative. He may even put a nasty tax on those — employers and employees — who evade the guide-lines of the social contract. If he does hand out a sop of some £1,000 million tax relief to the poor, what is that in an inflation age with fiscal drag pushing up VAT revenues?

So where does the market stand

from a technical point of view? At the panic-stricken bottom, when the index was 146, it was valuing equity shares on the average at 3.8 times net earnings (some even at under 2 times) which was equivalent to a net earnings yield of 26.3 per cent. In other words, equity shares were either very cheap or worthless. The panic over, they proved to have been very cheap. At the index of 277 as I write the average earnings yield is 20 per cent which still compares very favourably with the 143/4 per cent yield obtainable on old Consols. But will company earnings grow? Obviously not this year but the Chancellor has promised to repeat his concession of tax relief on stock-inflation profits and has eased the price controls so that companies can pass on more of the increase in costs to the consumer. All this would justify in my view a return of the index to the 300 level or even the 350 level if political events moved in the direction of a clash between the Gauleiter and a militant trade union over the guide-lines of the social contract. I am, of course, assuming that the `Gauleiter' will win.