MONEY The year in the City
NICHOLAS DAVENPORT
It was the most exciting and extraordinary year in the City I have ever known. Violence erupted in the stock markets as well as in the streets. The debut of the bear market was a sudden and violent fall in the 'leaders'. The shares which had led the bull market of 1968 seemed to be singled out for murder. Violence erupted also in the board rooms. There was the most vicious board room row in Pergamon Press ever seen in company affairs—it will no doubt end up in the courts—and the year ended with a brutal palace revolution in Viyella. Mr Joe Hyman, who gave a charming cocktail party to all his friends (including me) on 9 December was stabbed in the back on 10 December and literally thrown out of the management of the company he had created. The merchant banks, who should be setting a good ex- ample, seemed to be leading the descent into jungle warfare in the City.
The bull market petered out on 15 January with the Financial Times index making its 'double top' at 520. It fell sharply and quickly to 357, a fall of over 30 per cent. It then recovered and is now 390—about 25 per cent below the top. Professionals who manage the life funds, the pension funds and unit trusts will be glad to see the year go because they failed on the whole to beat the index. They proved to be no cleverer than the rest of us. They really should have known better than to brag about investment in equity shares being the great inflationary hedge into which all savings should be put. Your correspondent warned them as long ago as 20 September 1968 when I wrote an article about the absurdly high prices of equity shares. On 20 December 1968 I returned to the Charge with 'Farewell to the bull market'. On 3 January I ventured to contradict Lord Boothby, who had made two predictions for 1969: first, that the price of monetary gold would sharply rise and secondly that equity shares, and particularly international shares, would soar to un- precedented heights. Gold after its first flut- ter began to lose its appeal and by the end of the year the price on the free market had fallen from $44 to $35 per ounce. In- ternational shares also tumbled. Selection Trust, for example, fell from 252s 6d to 127s 6d (now recovered to 175s). And to make matters worse. Wall Street, after hold- ing up pretty well for half the year, fell at the end by 20 per cent—the Dow Jones index slumping from 968 to 769.
My simple argument was that as we have a Chancellor who is tough and deflation- minded, who will not allow much growth in the economy until we have secured a £500 million surplus on the balance of payments, it was obvious that the 1969 growth in com- pany profits would be miserable. This turned out to be all too true. Indeed, some im- portant companies have reported a fall in profits of 20 per cent or more. With wages running ahead of prices company profit margins have been squeezed unmercifully and with the tightness of money most com- panies have not been able to embark on the necessary investment to beat the wage-cost inflation. New capital issues floated on the Stock Exchange were over £100 million less. British industry, as I have said, has been stuck on the horns of a horrible dilemma.
Events in the gilt-edged market were as violent and as extraordinary as those in the equity markets. There was an unheard of slump. Bank rate was raised to 8 per cent on 27 February and in July the Treasury issued £400 million of Treasury 9 per cent 1994 stock—rates and coupons which have not been seen since the South Sea Bubble and the primaeval days of the Bank of England. All this was due to the fact that the Govern- ment changed its time-honoured gilt-edged policy. It told the government broker not to support the market but to allow it to fall to its 'natural' level which turned out to be most unnatural. Since the authorities took up the theory of control of money supply the Bank could no longer be allowed to support the gilt-edged market because that would in- crease the money supply. Mr Jenkins ac- tually undertook, in the so-called 'letter of intent' to the IMF, to limit the DCE (Domestic Credit Expansion) to £100 million a quarter plus or minus the balance of payments surplus or deficit. The shock to the market was electric. People began to talk of a 10 per cent Bank rate because the Euro-dollar deposit rates had risen to 9+ per cent and the equivalent Bank rate would have to be over 12 per cent to allow for the cover of forward sterling. Fortunately the Basle agreement, which was completed in the summer, removed this anxiety. The central banks put up £2,000 million to cover withdrawals among the official sterling area depositors. Thereafter we did not have to worry about 'hot money' being driven out of London. Also, the balance of payments began to im- pros e and actually moved into surplus in the second quarter of the year. In fact, the surplus is now officially estimated at between £450 million and £500 million for the twelve months ending in March. The gilt-edged market can now be described as a bull market under sedation.
So the year did not close in such a pro- found gloom as when it opened. Nerves had been quietened : violence had abated. The gilt-edged market was actually trying to go better while the equity share markets were seeking to establish a firm base for recovery in the hope that the April budget will usher in the first phase of reflation. But I have not \ I 'officially' declared the bear market in equities io be over.
ffolkes's taxpayers' alphabet
C. is for Child allowances
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