Militancy and the bull market
Nicholas Davenport
The idle chatter from the market place about the end of the bull market is what you would expect when people have had a fright. As violence rears its ugly head the first reaction is to run into cash. But peace — without much honour — has returned to the docks and our democratic way of life is still the rule, if not so strictly kept by the militant building workers. We may therefore look at the economic statistics again with more calm. And as far as the domestic scene is concerned we cannot fail to be reassured. With the exception of the volume of exports everything is up.
The Treasury has been revising upwards its figures for domestic consumption in the first half of the year and finds that they are in line with its 4 per cent forecasts, so that its over-all growth target of 5 per cent should be realised. Industrial output in the second quarter more than made good the decline in the first quarter, which followed on the miners' strike, and what is more the CBI survey indicated that more companies were planning to increase their stocks and their investment. Yet very few expected to increase their labour force. This implies that productivity is still improving and that company profit margins and profits should be well up. According to the Department of Employment output per head increased by 5 per cent between the fourth quarters of 1970 and 1971. The calculations made by one firm of brokers suggest that the trading profits of some 2,500 industrial companies reporting in the next twelve months will increase by at least 15 per cent. The price-earnings ratio on the 500 share index is now 18.8. On a prospective ratio of around 16 the market cannot therefore be considered too high.
But the gnawing fear remains that militancy is growing, that strikes will Increase and that the wage-cost inflation will get out of control. A flood of wage claims will pour over the dam of reasonable restraint next month when the local council manual workers and the electricity power workers table their claims for 25 to 30 per cent more. It is the public sector which has the worst record of surrender to unreasonable wage claims.
The idea that Mr Heath has been brutal to public servants is one of the myths which have grown around our uncommunicative Prime Minister. True, the postal workers last year only got a rise of around 8i per cent, but the power workers got 22i per cent, the strong-arm miners 22i per cent and the railwaymen 14 per cent. The greater the threat to hold up the country the higher the settlement.
In the private sector the engineering industry has shown much greater resistance to threats. When the unions tabled an extravagant claim which would have added E700 million to the wage bill the angry employers offered only a £1.50 rise. National negotiations broke down and Mr Scanlon instructed each local shop floor to claim 30 per cent or more from their individual employer. The employers joined hands to resist and set up a £2 million strike fund. Then reasonable local settlements began to be made and finally Mr Scanlon had to agree to a national settlement on the basis of 11 per cent to 12 per cent with some extra holidays. The quarrel cost the engineering industry 3,700,000 lost man-days and Mr Scanlon's union £750,000 in strike pay. So militancy did not pay off. The employers must see that it does not pay off in the building industry. I have seen outside my office window in the City how militancy works. A strong-arm gang appeared and forced the reluctant workers to leave a site where a new bank building was being constructed. This could hardly be called 'peaceful picketing.' Yet the law stood by and gaped. Indeed, the policemen marched off with the exulting gang when the site gates were closed.
It may be that some timid investors will prefer to remain in cash until they see law and order triumph over force or the law changed so that 'peaceful picketing' is defined as a token squad of, say, a dozen men and the police ordered to prevent more than that number assembling. The trade union leaders would surely support such a definition of peaceful picketing' seeing the rough treatment Mr Jones suffered outside Transport House from militant dockers; they must be as scared of violence as the timid investor. I cannot help feeling that peace in the public sector will not be restored until we stop paying the chairmen of public boards £25,000 a year and allowing the managements to regard the workers, and vice versa, as ' them ' and 'us.' Why not get the heads of the civil service to be the chairmen and why not share the local area management with the workers? We might then outlaw strikes in the public service. At the moment industrial relations in the public sector are more explosive than in the private sector.
What the investor should realise is that it is not so much the height of the wage settlement which upsets profits — prices are generally raised to match wages, and, if not, more workers are sacked and, more machines installed — as the loss of output caused by national strikes. According to another firm of brokers industrial production was cut by 2.1 per cent and industrial profits by 7 to 9 per cent in the first quarter of the year as a result of the national miners' strike. The Economist has worked out a formula — the strikeearnings ratio — on the basis of these figures and on the assumption that on average one-third of lost production is recovered after a strike. The formula gives the percentages by which a company's earnings would have exceeded its actual earnings over the past two years if there had been no strikes. As you may imagine, British Leyland comes out on top of this table with a ratio of 146. The bottom is Barclays Bank with 0, for the banks are not affected by strikes unless it is their own staff. The stores are little affected — GUS being 2 and Marks and Spencer General Electric and Westinghouse are bad — with 16. But worse is Beaverbrook Newspapers with 35, for newspapers cannot make up for lost production. The table is not to be taken too seriously but it does bring home the selectivity rule for investors. Avoid shares which are particularly exposed to strikes and labour trouble. The fact that the Jaguar strikers have held up a wonderful new model demonstrates the vulnerability of British Leyland.
If British labour troubles get worse the ultimate escape is to invest outside the country or in investment trusts which have the bulk of their portfolios in Europe or America. But I have hopes that with the help of Mr Heath we shall muddle through the present crisis of militancy.
There is no doubt we are in the midst of a revolution in industrial relations. In the five years to end-1971 income from employment (wages and salaries) has risen by.84 per cent and gross trading profits of companies by only 41 per cent.
The bull market had a splendid run from March 1971 to May 19, 1972, when it scbred a gain of over 70 per cent (from 305 to 543 for the FT 30 Index). It would not be surprising to see it churn around the present levels until the militants have had a decisive check. In the previous Tory administration the first bull market had to wait two years before it moved into new high ground. In the meantime there are plenty of shares which are outside the range of labour trouble. Gold shares, for example, have more than doubled since the beginning of the year.
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