Amms horrendus
Nicholas Davenport
Apart from a cheerful finish — due to the Arabian oil Christmas box — this has been the most unpleasant year for the Stock Exchange that I can remember. It was not because a bear market followed so quickly on a bull market — this has happened many times before — but because the slaughtering of prices was so savage and so widespread, falling on the good as well as on the bad. An investor who held a portfolio of solid defensive shares could have seen its paper value halved by the end of the year. There was no safe spot, except 'on the street,' that is to say, in cash in 'seven day' money which earned ever increasing rates of interest as Bank rate was hoisted to 13 per cent now.
Through their mismanagement of the money markets, that is, through their ill-conceived attempt to control the economy by the use of interest rates instead of by direct control of the volume and quality of bank lending, Mr Barber and his Treasury Knights are entirely to blame for the havoc caused in gilt-edged prices and in the financial sector markets.
Who could have imagined that 3i per cent War Loan would sink to below 29 to yield 121 per cent in perpetuity or "Daltons" to 20; to yield 12.4 per cent? To attract money the Bank of England had to issue two 'short' "taps" a a phenomenal rate of return — Treasury 101 per cent 1976 now yielding 10.9 per cent flat or 121 per cent to gross redemption and Treasury 9 per cent 1978 now yielding over 10 per cent flat or 12.4 per cent to gross redemption. Local government yearly bonds have had lo be issued with a coupon of 15 per cent.
The joint stock banks were allowed through the Treasury's massive £400 million reflation, to boost their trading profits for the half-year by 50 per cent to 70 per cent but to what profit for their shareholders? Barclays fell from 468 to 290 before recovery to 305 and Westminster from 473 to 272 before recovering to 283. As for the poor discount houses, their shares suffered even worse at the hands of the Treasury Knights who changed their working rules: some more than halved in value. The worst hit was Allen Harvey & Ross which fell from 975 to 300. Even the old-established merchant banks had to take a market knock of 40 per cent or more.
The freedom wrongly allowed to money-lenders by the Bank of England was exploited by what are called the 'secondary banks' who all came croppers as a result of collecting deposit money too fast and putting it out too riskily — in the second mortgage market and other speculative positions. Their shares suffered a terrible market eclipse when the truth began to dawn at the end of the year. Vavasseur fell from 246 to 85, Cannon Street from 90 to 28, Triumph from 124 to 40. The worst hit was Cedar Holdings which fell from 90 to 12 when the company had to receive help from Barclays and the big pension funds. London and County got into worse trouble and had to be baled out after its shares fell from 305 to 40. All these financial disasters can be ascribed to the regrettable lack of control exercised by the Bank of England over the money-lenders.
It was not a good year for any banking business. Even the great Slater Walker which has plenty of cash and a shrewd operating head, fell from 284 to 124 before recovering to 133. Edward Bates which had such a fine beginning at 337 fell to 155 before recovering to 180.
The unit trusts did well to sustain their net new investment from the public at £182.2 million for the eleven months against £215 million in the corresponding period of 1972. But their managements must be fearing further withdrawals which could force sales on an unwilling market. The total value of unit trust funds had fallen to £2,251 million at the end of November compared with £2,607 million at the end of November 1972.
Turning to the equity share markets as a whole the FT 'thirty' index fell by 40 per cent from 509 to 305 but recovered sharply at the end of the year to 335 when the Arabs promised more oil. Of course, if conciliation breaks down on the industrial front we may well see the index falling below 300 again which would present, as I have said, a new ball game for equities. Under the old rules a bear market does not fall below the bottom of the previous bear market, which was 305 in March 1971.
One of the worst hit of the industrial markets has been building and construction. Everyone expected a reaction, seeing the fall in house-building and the new taxes on development profits, but no one could have anticipated that a leading building share like Northern Developments would fall. from 187 to 44 (now 47) after a . doubling of its turnover and profits in the year to March 1973 and the forecast of a 25 per cent rise in profits for the year ending March 1974.
Bovis had a worse experience than Northern Developments. After the collapse of its proposed merger with P and 0 when the shares touched 362, the bear market drove them down to 83 before rumours of a take-over hoisted them back to 113. Even the great Trafalgar House, once a star in the property market and now, after taking over Cunard, a fallen star in the industrial market, was driven down from 152 to 60.
Oil shares were singled our for slaughter because of the energy crisis. Shell fell from 363 to 200 before the Arabs allowed recovery to 230: BP from 600 to 465 before the recovery to 545. This seems to be a market where better days can be expected. The chairman of Shell told his shareholders that the company is moving into nuclear power and coal, as quickly as it can. It has vast reserves of surface-mining coal in Indonesia.
Other industrial markets did not fare much better than oil. The capital goods shares lost 40 per cent, consumer durable goods 44 per cent, consumer goods 37 per cent and chemicals 30 per cent. The great market leader ICI fell by nearly 40 per cent from 294 to 182 before making an Arabian-nights recovery to 206.
The most disappointing market was that in investment trusts — the traditional haven for the cautious investor. The index fell by 42per cent. The major companies are now selling at a discount of no less than 30 per cent on their net asset values. Even an investment trust, which is wholly invested in the United States is selling at a discount of 25 per cent. The investment trust market is never a free one and when the turn comes there could be a sharp rise in this market.
But when will the turn come? Industrial shares have now dropped to levels Which would be regarded in normal times as a buying range. The average dividend yield is now nearly 6 per cent. The average earning yield is now 13!, per cent, and the average price earnings ratio, on the new net imputation basis, is now 10, having been as high as around 20 per cent over a year ago. Many of the leading shares are well below these averages. While confrontation on the industrial front continues no recovery will be seen, but the signal to buy will be given some time by Mr Joe Gormley and all.
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