Leaders and laggards of 1972
Nicholas Davenport
Once a week the Financial Times gives a list of 'leaders and laggards ' for the year on the Stock Exchange. It is remarkable to find that the outstanding laggard group for 1971 has been 'Motors and Distributors' down 16.3 per cent — seeing that the sales of new cars actually broke the records of 1964. Total car sales by the end of December will be close on 1,700,000 — about 30 per cent more than in 1971. Yet British Leyland shares have fallen from 56 to 33 (low) 29i and Chrysler (A) from 234 to 14 (bottom). The explanation is that foreign importers increased their sales by 57 per cent and have now captured 23i per cent of our market. British Leyland home sales gained by only eight per cent and Chrysler UK by 15 per cent. The foreign invasion is reflected in some distributors' shares where Pride & Clarke, who import Toyota cars, have risen from 136 to 455. The Lex Service group, the doyen of this market, have been held back by their diversification into hotels — when does diversification ever pay in the short run? — but being distributors for Volvo as well as for British Leyland and Rolls-Royce the market was unkind to knock their shares from 180 to 119, which is on a prospective price-earnings ratio of only nine..
The lesson of this story for investors is to avoid shares which are vulnerable to our industrial malaise — the militant trade unions. Motor manufacturers were hit early in the year by the miners' strike and later by constant interruptions to production by short-term disputes. Only Ford was able to maintain its output. It actually scored a gain of 70 per cent in sales but only because its 1971 record was so badly affected by a nine-week-long strike.
To be free of labour trouble in 1972 the investor would have had to confine himself, as indeed I advised him to do, to the financial group whose profits derive from money lending, mergers and manipulations and are only marginally reduced by salary increases to their less militant white collar men. This group scored an advance of 29 per cent in 1971 — the highest of the lot.
In this financial group bank shares rose by no less than 46 per cent. Among them the joint stock banks provided the safest run for your money. Barclays were the star turn. Their profits at half year were up by 45 per cent and their shares scored an advance of 57 per cent. National Westminster, with an initial 30 per cent rise in profits, were not far behind with a rise of 56 per cent. When the full results are published in February there ought to be some blushes. Either money-lending rates should be subject to the freeze or their exceptional profits should be subject to a Bank of England levy.
The merchant banks made an even bigger killing than the joint stock banks, for there was a spate of mergers and some of them — like the takeover of Watney by Grand Metropolitan — were of a colossal size. Keyser Ullman provided the fireworks, for, by rapid expansion through merger and take-over, its shares rose from 150 to 385 and finished up at 254. No one could beat that performance but the old established houses performed well enough — Schroders rising by 40 per cent, Mercury Securities (Warburgs) by 35 per cent and Kleinworts by 43 per cent. All these ended the year well below their tops and the general impression is that the merchant banks are reasonably priced for performance in 1973. Slater Walker scored a modest 20 per cent but I see that the Daily Mail has tipped it as "the share for next year" — coupled incidentally with Pearl Assurance which suggests a takeover. I should add that the financial activity in Hong Kong caused the shares of the staid Hongkong and Shanghai Banii to double. They came up from £13i to £31+ before closing at £29. It has now become fashionable for the up-and-coming merchant banks to open up new subsidiaries in the Far East. Their policy seems to be to get as far away as possible from Hugh Scanlon, who, I. see, has just given the sack to Hill Samuel — no doubt to the bank's great relief.
In spite of the current talk of the fabulous profits being made out of land development, property shares did not perform as brilliantly as the merchant banks. Land Securities, which I regard as the leader of the market, ended with a gain of only 24 per cent, Star with a rise of 37 per cent after 50 per cent at one time, and Metropolitan Estates a modest 20 per cent. Trafalgar House, which used to set the running, rose from 150 to 220 and ended at 192 after its unsuccessful bid for Bowater Paper. But its brilliant pull-round of Cunard suggests that it may concoct another coup in 1973 which will push it out of the property market and give it a property investment status as a huge and growing industrial empire.
The investor who confined himself to the consumer goods trades could not have gone wrong in 1972. The Government's bold reflationary policy — relieving the consumer of some £3,000 million of taxation — set in motion a boom in consumer spending which spilt over the stores, the mail order houses and the consumer durables catered for by the hire purchase finance companies. (I see the Hodge Group doubled at one time and ended with a rise of 57 per cent.) As a group, entertainment and catering shares rose by 27 per cent, food retailing by 25 per cent, electronics and radio by 20 per cent and stores by 144 per cent. Marks and Spencer failed to reach the average performance but GUS (A) bettered it and House of Fraser were outstanding with a rise of 30 per cent. The consumer boom can hardly keep up its 1972 pace when the price level rises again in the new year.
The speculator, as opposed to the routine investor, did best of all in 1972. He bought gold shares on the rise in the free market price of gold from $45 to $70 and doubled, his money! Gold is now $644 and remains the hedge against, Mr Heath's antiinflationary drive.
On the whole it was not an easy year for the investment manager. In 1971 you could not go wrong when the FT index of industrial shares rose from 305 in March to near 480 in December. In 1972 there was a heady rise to 543 in May but the index sank to 480 in July, recovered to 537 in August and sank again to 462 in September. Now it has recovered to 505 as I write. The down period from May to September looked like the beginning of a bear market and the present recovery may indeed, be just an interlude in a short-term bear market which will find its bottom if and when the Government finds itself in a headlong collision with the Trade Unions in Phase Two of its attempt to halt the inflation by statutory measures. Skinflint's original bet with me that the index would sink through 450 before it broke through 550 was lost as the year ran out. I await fresh offers — £1 bets only.
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