Labour and the City
Nicholas Davenport
"Put Britain first," said Mr Callaghan to the Labour Party Conference, repeating the words of the Tory manifesto. The City rightly did not jump to the conclusion that a National Government was just round the corner but it might have :shown a better response to the migortant fact that the Tribuneleftists at the conference failed to niove Mr Healey from his deterInitiation to rescue private sector industry from its acute financial crisis. I am not suggesting that the Centre and Right of the Labour Party asserted its dominance over the Left at this conference. Mr ,, ealey and other moderates only Just maintained their seats on the NEC. The understanding apparently was that the Healey rescue Operation — tax reliefs and FFI loans — was accepted only because the Benn machinery of the National Enterprise Board with its investment planning and equity participations in private enterprise was not yet ready to operate. But sufficient unto the day.The stock markets should recognise the good that Mr Healey was doing and the fact Mr Wilson had not only agreed but had warned the "big battalions" in the trade unions that if they broke the social compact there would have to be deflationary cuts and more unemployment.
The Chancellor has given back to private industry some £800 million
way of deferred corporation tax atid £800 million by way of relaxation of price controls. The latter concession is particularly important for the labour-intensive ComPanies. These can now pass on in higher prices 90 per cent of their Wage increases instead of the :former 50 per cent. (In the capitalintensive industries 65 per cent is allowed.) And all companies can Pass on the cash value of 171,i per cent of investment spending. ComPanies like Hawker Siddeley, Delta, IMI, Metal Box, Associated Engineering, Dunlop and British Oxygen are all labour-intensive as well as Can ital-intensive and should be able, thanks to Mr Healey, to increase their net profits by 21/2 per cent to 5 per cent. Their financial ueeze being relaxed they should ue' able to maintain their dividends. This is an important point for the .q,„..1;itY market because shares tend ay to be valued on a dividend ;Yield basis, not on their price-earn'ngs ratios. In the days of boom and growth the top shares used to sell °I) a miserably low dividend yield
and a high price-earnings ratio of over 20. This was because they were expected to grow at a rate of some 20 per cent. Besides, the companies with .p/e ratios of over 20 were able to take over companies with low p/e ratios so that their growth rate would be abnormally enhanced. But with growth flown out of the company window the price-earnings ratio is no longer so attractive to the investor as the dividend yield. The FT 'thirty' index of industrial shares managed to end the Labour Conference at 166 (above its low' of 1691/2 in November) and throw up an average dividend yield of under 12 per cent with a net p /e ratio of 9.3. With growth gone the cult of the equity has also gone but if the dividend yield is high and P/e ratio as low as two it would seem crazy for the life and pension funds not to seize the opportunity which Mr Healey has offered them and buy the equities of companies he is not only saving from financial distress but adding to their profitability. That is, providing the dividend yield is maintained, which may not be in the case of Dunlop (18.9 per cent). •
It was sad to see that the Prime Minister could not resist indulging at the Labour Conference in his old antipathy to the City. He denounced "the weevils at work" in the square mile. He first of all poured scorn on those people who, he said, had made money out of selling shares that never belonged to them during the Stock Exchange panic in August. The Stock Exchange Council is at the moment holding an inquiry into the extent of "short" selling but it is the professional belief that its market effect has been greatly exaggerated. If the 'bear' has to buy back his 'short' sale within the fortnight account he can actually help a market recovery. The Stock Exchange chairman replied to Mr Wilson with the reasonable comment that fears of increasing inflation, the liquidity crisis and the withering of profits through the price controls were sufficient in themselves to cause the investment selling which the Prime Minister regarded as fraudulent.
But Mr Wilson was not content to play to his Marxist gallery by abusing the 'bears' whose sporadic selling helps to make a free market. He went on to say that the practice of selling shares overnight and buying them back next morning to establish a tax loss — the so-called 'bed and breakfast' operation — was a fiddle which made a packet for jobbers and brokers and deprived the Exchequer of future tax revenue. It was, he added, an abuse of the fair society. This was a particularly 'below the belt' stroke because a fair society would not exact from a shareholder a paper capital gains tax of 30 per cent without allowing for the inflation which had reduced the real value of the shares sold. The 'bed and breakfast' operation is a completely legal form of tax deferment which is known to and accepted by the Inland Revenue. For widows and those retired elderly people who have worked hard to put away their savings into shares — and have seen their market value fall by two-thirds or more — it is hard to be reviled by their Prime Minister and hurt by their Chancellor, who has actually increased their investment income surcharge by reducing the pre-surcharge savings income to a miserable £1,000.
If Mr Wilson would only put on the clothes of a statesman when he talks about monetary affairs he would draw public attention to the urgent need for reducing the rates of interest on borrowed money which is killing the business world, prohibiting investment and increasing price inflation. We have a Bank rate of 12 per cent and overdraft rates of 13 per cent to .15 per cent. At these levels business cannot live and make a profit; nor can companies consider borrowing for long-term investment. Why did not Mr Wilson describe the inordinately dear money rates as "the weevils at work" instead of abusing the few investors trying to protect their ravished savings by protective selling and reinvestment?
Dear money is, of course, a world problem. The extra $60,000 million the industrial nations must pay the Arabs this year for oil will become in seven years $120,000 million if left on deposit at 10 per cent compound interest. We need a world monetary conference as urgently as a world energy conference to plan measures to get down world rates of interest in order to save ourselves from the Arab monetary squeeze. If only Mr Wilson had turned his mind to this vital question instead of chasing wild geese in the City!
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