MONEY
On the brink
Nicholas Davenport
In recent weeks I have more than once suggested that our long-term bull market had started off with too hot a pace — a rise of about 40 per cent in four weeks — and that it had been due for correction for some time. It certainly got it last week when the chairmen of our two largest companies — ICI and Shell — knocked it for six — or rather seven points off the FT index.
No one seems to have expected such a dramatic fall — 28 per cent — in the third quarter profits of ICI. But everything went wrong all at once. There had been a new pay agreement which added 10 per cent to the wages bill, there had been a slow-down in European trade, there had been an increase in capacity (witness the increase in depreciation charges) and no chance of any rise in prices. Result — an ominous drop in pre-tax profit margins to 5.4 per cent against 9.6 per cent in the previous quarters. ICI is usually regarded as the bell-wether of British industry but chemicals are too volatile for such a role. Any financially sound company can put up a new chemical plant — there is no technical problem — whenever it judges or misjudges the demand to warrant the expenditure. And the demand in Europe slowed down.
No one,.also, expected Sir David Barran, the chairman of Shell, to upset the oil share market. His company had already reported a drop of 6.8 per cent in third quarter profits but as the net income for the nine months was still 8 per cent above he 1970 level no one was greatly alarmed. But Sir David magnanimously deigned to address a meeting of financial analysts in the Shell Centre last week and let the secret out that the final quarter was going to be no better. Here it is not just a question of a slow-down in European trade but in world trade. For the first time in thirteen years the volume of oil sales in one quarter fell below the level of sales in the corresponding quarter of the previous year. And in the case of the oil industry most of the costs of operation are fixed costs, so that a 2 per cent fall in the volume of sales ends up in a 12 per cent fall in the amount of net income.
Of course, Sir David is optimistic for the long term but he brought home to his audience what I have been trying to impress upon investors for some time — the risk of a slow-down in world trade running into a real recession through the prolongation and spread of national protectionism. He added: "One can definitely say that the level of industrial activity in the short term will depend largely on the successful resolution of the present imbroglio in international trade and monetary affairs.
International trade is the key factor in economic growth. It is therefore essential that the situation be resolved before protectionism becomes habitual." How right he is! Business men must be able to deal freely in forward exchange if world trade is not to collapse.
There seems, as I write, to be greater optimism about an early settlement of the monetary crisis. President Nixon is flying to meet M Pompidou in the Azores on December 13, Mr Heath is flying to meet Mr Nixon in the Caribbean a week later and Mr Nixon has a date with the Japanese prime minister the first week in January. An ex-diplomat friend assured me that heads of state do not arrange these flying meetings unless some agreement has already been hammered out by their seconds. But President Nixon has not got a Lord Goodman but a Mr Connally and it may be that no agreement has yet been worked out and the heads of state are meeting because the trade situation is desperate. The difference between Lord Goodman and Mr Connally is that the first is a nice, kind man who likes to help people while the second is a hard tough Texan who likes to help America but knock every one else who stands in his way. He has made it clear that he wants a contribution to American defence costs in Europe and 0 liberalisation of the EEC agricultural policy parallel with a substantial up-value' tion of the currencies of the great trading nations who have been indulging in unfair trading practices against American good8 — and no damned nonsense about writing up the price of gold. He is even suspected of believing that an upturn in the Ameri• can economy comes before — and irr dependently of — an upturn in world trade. He is reported to be in a very bad mood.
Mr Connally is not the only one in a had mood. Tempers are frayed everywhere. The row between Lord Crowther and Sir Non' Piano Forte is typical. I have been in board room rows myself, but I have never seen anything like the vitriol thrown at each other by the chairman and deputy chairman of Trust-Houses-Forte. A row over money creates more bad blood than anY other. The finance ministers squabbling over their currency parities take on a For' tissimo rage. It must also be remembered that the Japanese and the Germans suffered humiliating defeats in the great war and have been restoring their injured national pride by boosting their exports and swelling their gold and currencY reserves so that they vastly exceed those of their victors. Mr Connally is hardly the man to soothe injured national nerves.
The latest news is that at the Rorre meeting of the Group of Ten finance ministers this week a tremendous effort will be made to keep it cool and draw up .a preliminary agreement. Mr Connally Is taking in his team of experts the mild mannered Dr Burns, the chairman of the Federal Reserve, and Mr Volcker, the Treasury Under-Secretary, who may be relied upon to be more flexible than their chief. It is said that Dr Burns has coil' vinced the President that the American economy cannot be expected to revive in 8 recessionary world and that a currencY settlement, even if provisional, is therefore essential. The guess is that an upvaluation of the yen by about 17 per cent and of the D-mark by between 10 per cent and 12 per cent, and a write-up of gold by up to 7 per, cent will be the grounds for a removal or the surcharge next year. Delegates must have all their fingers crossed. While the great uncertainty remains and, the threat to world trade stays the bull market on our stock exchange should pause. But it won't.. Like every one else it has become pig-headed: it just won't Ile, down. Wall Street is rallying strongly and every ` bull ' is convinced that a settlement of the crisis is just round the corner.
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