ECONOMICS AND THE CITY
Market assessment
NIcholas Davenport It is time to re-assess the strength and/or the weaknesses of the security markets in the City. From its low point of 146 on January 6 the FT index of industrial equity shares has soared to 378. It is now difficult to find an attractive share which is not more than three times higher than it was at the beginning of the Year The explanation is simple. The low point of the bear market marked an exceptional crisis of confidence. The old boys' brigade in the CitY, which is responsible for investing the savings of the people, had then come to the alarmist conclusion that the Labour Go vernment was all set to destroy the Private enterprise system to take it over bit by bit because profit Was regarded by their party a-s an evil, dirty business. When the Chancellor showed by his budgets that he had no such destructive intention that he would actually relieve companies of corporation
tax on the inflation-profit of their stock in trade in order to restore their liquidity sentiment changed almost overnight. The old boys' brigade began to buy equity shares again at first cautiously, then in increasing volume until in the
second quarter of the year their net Purchases amounted to nearly £50 million a week. Thereafter the equity market became an up-and-down trading affair, waiting for another lead lrorrt the Government. This came When Mr Benn, who had been the ,searifying Industry Secretary, was ulsraissed from his job and relegated to Energy, with the further ca. veat that he was not to interfere in the delicate finance negotiations regarding the 51 per cent "particiPation" in North Sea oil. The equity market then became more bullish and this return of confidence was reinforced when the Government _seethed to recognise that Britain ,was caught in a long-term industrial decline and that radical steps
would have to be taken to re-structure the economy, so that manu
,racturing industry, which had fallen to 30
although per cent of the GNP -ough responsible for 80 per cent or our exports, could be restored to
a More vital and profitable role. A 'summic
meeting at Chequers was
called so that the TUC, the CBI and the Government could work out a new industrial policy. The conversion of a Labour Government to the view that industrial profit was a blessed, not a dirty, word struck the market as a volte-face as remarkable as the conversion of St Paul. It set the FT index going for 400.
The Queen's Speech was an anti-climax. The fine words of the Chequers summit appeared to be double-talk. All the nationalisation measures were back in full strength with the nasty addition from Mr Foot extending the dockers' stranglehold on the ports to the cold storage depots. Mr Varley, the Industry Secretary, did not try to spell out to the Commons the new industrial policy but contented himself with emphasising the stark facts of our industrial decline. The market has therefore to reconcile itself to the fact that Mr Wilson cannot escape from his socialist manifesto: it can only hope that no further nationalisation proposals will be forthcoming. It may take heart from a senior minister's speech that of Mr Crosland now published this week in a Fabian pamphlet that wholesale nationalisation would not cure the underlying weakness of British industry and that a mixed economy was essential to social democracy.
The old boys' brigade in the City will have to make a political judgment before they put more than their usual quota of funds into 'the equity market. They will not like the remarks of Mr David• Basnett, Secretary of the General and Municipal Workers, who recently said that "in many ways the misallocation of financial institutions in the deployment of their funds has been a major cause of our economic weakness. One of the major sources of institutional funds is the pension fund. Workers and their trade unions are increasingly demanding a say in the managing of these funds. Too large a proportion of these fund resources goes into overseas investment, property and other sectors with little or no social return." But what about the financial return, Mr Basnett? The old boys are trustees for the pensioners and will not commit their
funds unless they see a proper return. Mr Harold Lever, Chancellor of the Duchy of Lancaster, said in a recent speech: "A forced investment is a declaration of war on the private sector. A forced investment can only be one which the institution believes to be against its interest. It cannot be a sound basis for giving our workers full employment at good wages."
A professional objection to putting more funds into the equity market is what is called "the reverse yield gap." The average dividend yield on equities is only 5.7 per cent while long-dated government stocks yield 14 per cent. And dividends are still legally restricted. So what is important is the view which the old boys will take (a) of the strength or weakness of the gilt-edged market and (b) of the likelihood of dividend restraint being abolished next April.
However, one must not exaggerate the importance of the old boys' decisions. Money talks and the weight of money in the banks is pushing up security prices. In the first six months of the present financial year there has been a budget deficit of E5,100 million which has been financed by E2,600 million sales of Treasury bills, £1,500 million sales of gilt-edged stocks, £200 million by increased small savings and £800 million drawn from the reserves. No doubt the Treasury hopes to sell an increasing amount of gilt-edged stocks in the remainder of the financial year but it cannot escape another tranche of Treasury bills which go to swell the resources of the joint stock banks. As manufacturing industry is not yet a large borrower from the banks these funds will spill over into the security markets. One hopes, therefore, to see a rise not only in the gilt-edged market, prompted by further cuts in American interest rates who can expect a recovery from the present world recession without cheaper money? but in the equity share market as well. We may therefore see continued pessimism about our political and economic future under Labour combined with short-term bullishness about the security markets in the City.
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