ECONOMICS AND THE CITY
The Equity balancing act
Nicholas Davenport,
The sharp reaction in share prices since the issue of the £6 White Paper should be interpreted not as a sign to get out but as an opportunity to get in below the 300 index level, that is, if you believe that Britain will come to its senses and defeat its inflation. I was glad that the market fell on the White Paper initially. If there had been an immediate sharp rise it would have been falsely proclaimed by the Left as a proof that the City benefits from the sacrifices of the working man. When the market finds time to study the White Paper and read between the lines — lines like "The Government, the TUC and the CBI are agreed that this (inflation) rate should be brought down to no more than 10 per cent and to single figures by the end of 1976" — it will wake up to the fact that this is the greatest consensus document we have yet seen for the preservation of our mixed economy and the dismissal of revolutionary Marxism. It might even give the Stock Exchange a brief honeymoon period until the Labour conference in October when the TribuneMarxists will, of course, make a determined effort to _defeat the moderates and end the consensus.
Mr Wilson has been given the credit for the White Paper miracle but the "£6 a week flat for all full-time adults" was Mr Jack Jones's brain-child and it was he who got the TUC to produce the document, 'The Development of the Social Contract' on which the White Paper was based. Mr Wilson was alert enough to seize this amazing opportunity for consensus. He is like a superb surf-rider balancing on the dangerous waves of British politics. He is actually riding two surf-boards at the moment, for Labour is two parties, and one day he will fall off one which I hope will be the Tribune-Marxist board. But for the moment he is precariously balanced on the two and exciting even the City's admiration.
Whether the White Paper will work and survive the winter pay storms no one can tell. The CBI have their reservations and rightly insist that the Government must take responsibility for monitoring pay settlements. Otherwise they say the incomes policy will collapse. The CBI want a code of practice to guide employers and trade unions. The chairman of the Retail Consortium would also like Mr Healey to stress that unions and 'Wage councils should negotiate at lower figures than £6 for many retailers could not make a profit _after conceding a full £6 wage increase. These are reasonable points which the Government must try to meet. The White Paper definitely states that "the Government do not intend to push price control to the point where it would endanger employment and invest, ment." They add: "There are in the pipeline many increases in costs which are coming through in prices and this is particularly true at present following the big increases in pay and other costs of recent months." This is as good an assurance as the members of the CBI could expect that the Government intends to see that the private sector of the economy not only remains profitable but makes enough profit to finance additional investment.
Anomalies are bound to arise which will upset the Left but the biggest outcry will be over unemployment. The private employer who pays more than the £6 will go bust because he will not be allowed to pass on the unlawful increase in wages on higher prices, but the public employer — local authorities and public boards — who breaks the wage law will have "cash limits" imposed on his expenditure which will force him to reduce his services and therefore employment. How the 'cash limits' will work has not yet been explained — one splendid idea-is that the minister who is responsible for the -public board paying illegal wages should be sacked — but the White Paper says that there is a range of expenditure where "the Government's purchases of goods and services will have to be cut back if prices rise too high." This spells out more unemployment. And the Left objectors to the White Paper will howl when they find out that a new official forecast already reveals unemployment reaching 1% million during 1976 — instead of the 1 million forecast by the Chancellor in his budget. Allowing for the coming registration of students and school-leavers this summer the more likely figure for total unemployment is between 11/2 and 2 million before the end of 1976. This will make the Left wild but the bulk of trade unionists, I believe, more
frightened, more reasonable and more solid behind the White Paper.
How far this dismal economic prospect will deter the institutional investors who are not yet fully invested in the equity market, will depend on the political balance. In my view it is far more important for the institutional investment manager to know that the political consensus can hold than it is to be told that recovery from the deep world recession will be delayed longer than he expected. What matters to him is that the private sector will be allowed to function profitably and will not be taken over by a Marxist state. So the October Labour conference will be a decisive market influence. The TUC conference in September does not present the same market threat, seeing that the miners now recognised that Britain is in financial trouble and have therefore agreed to the White Paper. If the miners are for, what union could be against?
So the equity market, as I have said, remains a trading market with the chance of recovery up to the Labour Two-Party conference. Discussions are going on at the moment between the Bank of England and the top directors of the life and pension funds as to whether they could earmark about £500 million for equity investment which could follow up the FFI loans whenever the National Enterprise Board on the recommendation of Sir Don Ryder, presents a good case for it. This is a sensible proposal. The life and pension funds have already allocated about £800 million for loans issued by the FFI "bank" and an equity follow up would be a reasonable extension. For thirty years when I was a director of a life mutual society 1 was always advocating such a tie-up between Government and City investment. It seemed to me incredible that the boards of directors whose life and pension policies now collect £3,000 million a year gross (or £2200 million net), were never given any guide-lines by the Treasury and were free to invest these vast sums where their fancy took them — 'which might be the Far East or South Africa.
Meanwhile the boom in the gilt-edged market, which I was praising last week, goes on in full spate. Since I wrote the Treasury has issued another "long tap" to replace the £500 million one which disappeared in three and a half days' hectic trading. The new one is £700 million of Treasury 131/4 per cent 1997 and so enormous were the applications that the Bank has announced that it will no longer be regarded as a "tap" stock when it is quoted. This is an unprecedented event and may indicate unprecedented speculation. To have sold £1200 million of stock in a fortnight — and perhaps £3000 million in all this financial year to the nonbanking public — must please the Treasury which has to finance a borrowing requirement of £10,000 million.
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