Investment Lessons of 1966

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By NICHOLAS DAVENPORT

WHERE there is movement there is always money to be made out of the stock markets but it has been a very difficult year for anyone who has tried. An understanding of political as well as economic trends has been essential and as the Prime Minister has been governing by his daily in-tray it has been almost impossible to predict the political. Could any investor have foreseen that a government which had based all its social reforms on a growth of the economy would end up by imposing stagnation—through the most severe deflation the economy has ever had to suffer? Or that an economics minister who had called for voluntary restraint from both sides of industry and disclaimed any intention of controlling incomes would finish up by taking statutory powers to fix wages and prices? Or that a chancellor who had inflicted on the City the most odious taxation and was universally loathed last year would have been received with acclamation last week at the Stock Exchange pre-Christmas lunch? It is small wonder that business in the stock markets dried up—to the ruin of many jobber and broker firms—or that a period of disillusionment set in from June to November, during which the FT industrial equity index fell by 24 per cent.

The change in the investment climate has been dramatic and not everyone in the City has appreciated the lessons to be drawn. There are some who still blindly believe in the cult of the equity, who imagine that as the Government is bound to reflate the economy sooner or later it is bound to reflate the market prices of their equity shares. These are the smug, complacent investors who are really too lazy to do anything but sit supinely on their portfolios, kidding them- selves that the more 'representative' of British industry (good or bad) their portfolios are, the prettier they will sit. These bone-headed types will be in for a shock. This Labour government has shown by its selective investment grants, and by its selective employment tax, that it does want a general reflation of the economy. It will cer- tainly not reflate the consumer goods industries. It will try, when the time comes, to reflate only the investment industries, especially those which can produce sophisticated capital goods for ex- port or in substitution for imported manufactures. It will do nothing, if it can help it, to reflate the market prices of a general equity portfolio. Gone are the days when the investor could rely on an annual increase in the gross national product showing up in an annual increase in the gross

trading profits and dividends of companies. The equity share markets have lost—perhaps for ever —their secular upward trend. That is the first in- vestment lesson to be learned from 1966. One might go even further and argue that the equity share is no longer a medium for long-term in- vestment: it is something to be traded in—for the short term. And if you are clever, much money can be made out of trading.

The next lesson is that the equity markets are not a reliable hedge against inflation. There have only been two periods since the war when equity shares behaved perfectly—the bull market from June 1952 to July 1955 and the bull market from February 1958 to January 1960. The FT index rose 1174 per cent in the first and 123 per cent in the second. Thereafter the continued application of its 'stop-go-stop' policy by the Tory govern- ment—with increasing severity for the `stops'— brought confusion to the equity market. At the end of a bear market in December 1960 the FT industrial index stood at 293. In November 1966 it had dropped to 284. Yet in these six years the index of consumer prices had risen by nearly 25 per cent. So equity shares had utterly failed to protect their holders against the fall in the value of money.

This lesson, when it has been learned, could begin to lessen the appeal of the unit trust. There is no doubt that the popularity of the unit trust movement grew with the inflation. The more the units were able to offer an increasing dividend income, the more the public wanted them. The income attraction seemed more important than the capital. But the first set-back to the movement came when the equity markets ran into trouble in 1965. Recovery followed with the up-turn in the equity market in the first half of 1966. The net amount invested in unit trusts in the eleven months of 1966 topped £100 million against £54.7 million in the same period of 1965. But what will happen when unit holders realise (a) that an increase in equity income can no longer be expected in 1967 and (b) that no capital pro- tection has 'been given against the fall in the value of money in the last six years?

I am not presuming to argue that the wage- cost inflation has been killed for all time. It might start up again in 1968 if the Government has no workable incomes policy to follow on the period of severe restraint which ends next summer. But inflation has surely been killed for the time being and the realisation of this could bring about a preference for bonds against equities on the part of the investing public as well as the investment institutions over the next six months. It is notice- able that the public is being increasingly attrac- ted into the gilt-edged stocks which are already trading, or are about to be traded, in a capital tax-free zone. Here is a list of them: Investors who have bought stocks at higher than the current market price have, of course, a tax-free zone of their own creation and it passes my comprehension why the Treasury did not allow a moveable tax free 'points' system (the amount of tax-free zone being expressed in points) so that we could all move more freely about in the market.

As for the institutional investor, he will surely be more bond-minded than equity-minded in the next year. From 1952 to 1964 the life and pension fund managers hotly pursued the policy of the equity cult. By this time they were putting £156 million a year into equities. But in 1965 this had dropped to £86 million or 221 per cent of their total portfolio. This disillusionment with equity investment will no doubt continue. Whether they will adopt a new policy of trading in equities will depend largely upon the skill and liveliness of their managements. Some have already stopped buying sterling equities and in- vest only in dollar equities, seeing that the American government believes in free enterprise and will back the profit-makers. But there will no doubt be plenty of opportunity in 1967 for trading profitably in sterling equities, this being the year when the Government starts reflating selectively and cautiously. 96f 73} 75* 90.9 Exchequer 5% 1967 Transport (Wagons) 3% 1968/73 Treasury 31% 77/80 Funding 5}% 82/84

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