In the City
Investing in Britain
Nicholas Davenport
As Lord Kaldor startled us all last week by quoting an anti-free, trade and highly socialistic anti-capitalistic statement made by Joseph Chamberlain in 1905 I will startle him (I hope) with the following quote about wage claims: 'Most people who have given their minds to the problem are now convinced that a national wages policy is an inevitable corollary of full employment if we are not to be engulfed by inflation. The trade union world is involved in a continuous succession of wage negotiations. It is no use railing at the union leaders, for their difficulties are real and perplexing. Nevertheless, a new departure will have to be made if the British economy is not to plunge from a condition of unbalance into a fatal tail spin'.
Who do you think said that? It was Aneurin Bevan in his book 'in Place of Fear' in 1952. When I read it originally thought that if ever Nye Bevan became prime minister he would quickly dispose of trade union power, and the blackmail of militant shop stewards. Alas! his early death deprived us of a potential Cromwell. But his Spirit apparently lives on at Longbridge. The non-militant workers on the shop floor refused last Friday to obey their communist shop steward's call for a strike. 'We want to Work', they cried. One of them shouted: Listen to the lads who do the work for a change instead of the bloody shop 'stewards'. His words were heard with great rejoicing on the floor of, the Stock Exchange. A drifting market suddenly sprang into life and recovered its morning losses.
This incident is not without its significance for the investor in British equity Shares, I remain a bull of select equities but was never a devotee of the cult of the equity. The reason why the cult of the equity collapsed was because 'full employment and growth' — the Keynesian economic policies to which all the western governments were committed after the war — could not be maintained simultaneously without inflation. This was not at first realised in the market. It felt that as 'full employment and growth' implied an annual increase in the GNP and therefore in the turnover and gross trading profits of companies this would give to the equity share market a secular upward trend. It did for a time after the Tories had regained power in 1951. There were two magnificent bull markets — 1952-55 with a rise of 117i per cent and 1958-60 with a rise of 122 per cent — but Tory attempts at 'demand management' by the use of monetary controls, their `stop-go' cycles were the end, completely upset the rhythm of the equity markets. It is my belief that the trade union leaders would never have thought of the ghastly ritual of annual wage claims if they had not seen both Tory and Labour Chancellors producing the equally ghastly ritual of annual 'demandmanagement' budgets. There was never any serious attempt at consensus planning except under George Brown.
It follows that the equity share markets, instead of having a secular upward trend, now tend to oscillate between 'fair' and 'foul' on the national economic barometer — 'fair' being when inflation is declining and the budget reflating and 'foul' being when inflation is rising and the budget is deflating. The next budget is pretty certain to be reflationary, that is, to restore the buying power of the depressed worker-consumer by cuts in direct taxation. That surely explains why the present bull market in equities is maintaining its Man. The National Institute of Economic and Social Research in its latest Bulletin has given the statistical case for reflation. It predicts zero growth for the economy this year — against per cent growth forecast by the Treasury — and sees the PSBR (public sector borrowing requirement) falling to £7 billion — against £8.5 billion forecast by the Treasury — which gives room for a reflation of around ill billion. It would be difficult for the Chancellor to cut direct taxation in an autumn budget — the already over-worked Inland Revenue staff would certainly revolt —but it will be possible for Mr Callaghan to tell the TUC at its annual conference next week that a relief of direct taxation will be coming next April if they can induce their unions to exercise real restraint in their pending wage claims. This particularly applies to the unions in the public sector. We have already had wild demands for 63 per cent from railwaymen, 47 per cent from British Leyland and 43 per cent from municipal manual workers who must (if they are sane) be bluffing.
If the Government were confronted by unreasonaly high and inflationary wage claims in the public sector it should stand firm if it has any guts, and rely on the support of the moderate trade unions in the private sector.
The equity share market will be highly sensitive to any crisis which may develop between government and TUC over the coming weeks. The market may, I admit, be taking a too over-optimistic view, for it undoubtedly believes that a more con servative stance is being taken by the rank and file worker on the shop floor who is not politically motivated, that a major wage explosion will be avoided and that this will enable the Chancellor to reflate the economy next April.
I am in sympathy with this view, for it is good to know that the big international investors — the managers of the life and pension funds — believe in Britain and are not trying to invest their money outside this country. It is also good to know that the highly professional private investors who have been putting their funds in American, Australian and Far East markets, have caught a cold. If they have bought foreign shares through the investment dollar pre mium market they have seen the premium drop from an effective 40 per cent or more down to 25 per cent. Of course, when there is a strong pound there is usually a weak dollar premium, but rumours are flying around that the dollar premium market is to be wound up, as the EEC requires where there is a strong balance of payments surplus.
But leaving technicalities aside, the astounding and comforting fact is that over the past twelve months the index of British equity shares has risen about 30 per cent while that for American has dropped 15 per cent or more. Historically British equities are still cheap, for most shares are selling at below their net asset values, at under ten times their earnings and on a gross dividend yield of around 5i per cent which could well be doubled when dividend restraint is removed next year. But please keep, if you are a buyer, to the companies whose management is on good human terms with its labour force and is not dominated or frightened by communist shop stewards.
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