Don't just slump, do something
Nicholas Davenport
My call to action is directed Primarily to the life and savings institutions who are all alive and kicking, and secondarily to the Government which seems only half alive and perhaps incapable of vital action. When some £30,000 million has been lopped off the market value of shares of listed British companies — exclusive of the huge losses on • foreign shares and unquoted property, when it has become impossible to make new issues on the capital market, so that the flow of savings into productive investment has virtually stopped, something positive should be done to restore the capitalist system to health and stop the rot. Immediately! But nothing but a terrible moan goes up from the financial Press.
, When the FT index of thirty industrial shares dropped below the 200 mark on Monday, August 19, a fall of over 63 per cent from the 543 top of may 1972, rumour after rumour ran through the market that worse was to come, that many more failures in banks and insurance companies were to follow on Court Line and the rest of the dying ducks, and that the end of the capitalist system was in sight. To all these frenzied moaners and rumour-mongers I would say that I have seen it all before. The capitalist system is very often in crisis, is always changing its form but is certainly not moribund.
To go back to some previous crises, there was a fall of 52 per cent in the 1929-32 bear market during • the great slump. (There was much More in Wall Street but that was because of the greater quantity of dishonest or irresponsible promotions of utility holding companies in the preceding boom.) There was a fall of 61 per cent in the bear Market of 1936-1940 which lasted forty-three months. When you can have bull markets registering rises of well over 110 per cent, as we had in 1952-55 and in 1958-61, you must expect to see losses of up to, say, 75 per cent in bear markets which are exceptionally bad. And this one is exceptionally bad for the following reasons.
In the first place we have a minority Labour coalition in power whose left wing would really like to destroy the capitalist system while its nght wing, which would support a mixed economy with a prosperous private sector, seems to have lost the ear of the Prime Minister. In the second place, we have a Prime Minister who is not prepared to tell the economic truth. In the White Paper on the 'regeneration of British industry' (surely a spelling mistake for `degeneration'), there is not a single mention in the paragraphs dealing with the bad investment record of the fact that British labour is noted for its strike records and for its indifference to productivity deals. When the Prime Minister writes that "in 1971 investment for each worker in British manufacturing industry was less than half that in France, Japan or the United States and well below that in Germany or Italy" he does not feel it necessary to add that British management was finding it almost impossible to get the labour uniona to co-operate in increasing productivity. If Mr Wilson cannot speak the economic truth how can be provide leadership or expect to regain the confidence which is now lacking in British industry?
In the third place, there is a raging wage-cost inflation which is only presumed officially to be restrained by the so-called social contract' As! have pointed out, this is not a social 'contract' at all. It is an understanding between the Government and TUC that "if you scratch my back I'll scratch yours." Mr Healey has scratched Mr Len Murray's back with a wealth tax paper which is cynically against economic growth. Mr Murray suitably purred, but in the last three months wages have risen at the annual rate of 30 per cent. The last twelve months' rises for wages and prices have been 18 per cent and 17per cent respectively. As the Economist has pointed out, inflation has made this worse than all previous bear markets. An investment of £100 in the FT index in 1935 would be worth £200 in today's depreciated currency but only £40 in real terms after allowing . for the rise in prices. Thus, the ,market is valuing the top industrial companies at 60 per cent less than it did in 1935. Is this justified? The question should make the investment institutions sit up and do something if it is not justified.
The positive action which I beg the life and savings institutions to consider is to take concerted action to place buying orders in the market when they see the index under 200 and offering strong and sound company equities at only three to six times last year's
earnings. It is not my province to tip shares but I find a leading company in the retail trade with no liquidity problems selling at under six times earnings and offering a dividend yield of over 9 per cent, another in breweries on the same basis, another in electricals (with a lower dividend yield), another in cement at under five times earnings and a dividend yield of nearly 15 per cent, another in paper on the same earnings basis and a yield of 8 per cent, another in domestic heating at under three times earnings and a yield of 11 per cent, another in construction, engineering and shipping at under four times earnings and a yield of over 81/2 per cent and finally dear old Shell, the family trust favourite, with an estimated price-earnings ratio of 3.1 and a dividend yield of 9.8 per cent. I could go on and double the list.
My call to action is addressed to the business managers of the long-term life, pension and annuity funds. The members of the British Insurance Association publish their net premium income i and investment annually and it s interesting to see what they did with them in 1973. Their net premium income for long-term business in that year was 8.9 per cent higher at £2,424 million. Their long-term investing was 13.7 per cent up at £2,201 million, bringing their total investment .funds to £18,211 million. This was distributed as to 15.6 per cent in gilt-edged, 15.7 per cent in debentures and loan stocks, 16 per cent in mortgages, 16 per cent in real property and ground rents, 8.9 per cent in 'other' investments and 27.8
per cent in equity shares. (Incidentally these are 'book' values, but the BIA add a note that market values at the end of 1973-were roughly 15 per cent above 'book' values.) It will be observed that they put £485 million into equity shares in 1973 — at the rate of over E9 million a week. This year they must have stopped buying equities, and put their money on the `street' for the FT index dropped abruptly from around 340 to 200. I venture to suggest that the managers of the life funds gather together at the offices of the BIA and agree upon a joint investment plan — such as putting £5 million a week into equity shares whenever there has been panicky selling and the index is around or below 200. After all, seeing that they had £5,070 million invested in equity shares (book values) at the end of 1973 and that some £2,000 million has since been lopped off their market values they would be helping to restore the value of the underlying assets of their life and pension funds. ,My second call for action concerns the Government for it has to deal with the rate of interest and the gilt-edged market. This is a more difficult problem and must be reserved for next week. Suffice it to say that until the rate of interest is brought down to a level which would allow an industrialist to borrow for investment in plant and make a profit there can be no recovery in our demoralised economy. Businessmen might as well close down and buy undated Daltons (Treasury 21/2 per cent), for, the yield of 16.05 per cent is greater than the price of the stock which is 15 5/16 xd.
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