BRITAIN AND THE BOOM—IV CONFIDENCE REIGNS ON STOCK EXCHANGE

Press, Volume XCI, Issue 27612, 19 March 1955, Page 6

BRITAIN AND THE BOOM—IV CONFIDENCE REIGNS ON STOCK EXCHANGE

[Bs/

RICHARD DENMAN,

of the “Economist”)

London, Mafth 7.—Since June, 1952, when the upward movement in industrial shares began, the index of industrial shares prepared by the “Financial Times” has risen from 103.1 to 186.2. True, there have been hesitations and interruptions in the upward rush, the most serious of which occurred when bank rate

went up to 4J per cent, and brought the index of security values back from its peak of 197.5. Nevertheless, the buoyancy of the market has been quite uniriistakable, and, indeed, it is now slightly higher than when the Chancellor gave it his shock towards the end of February. Perhaps the most striking feature of the share boom has been this inextinguishable confidence —the discounting of all adverse factors. This confidence in itself argues that there has been some solid background to the bull market of the last two and a half years, and closer inspection shows that the gain in values is based on genuine industrial achievement. Last year, of course, saw a rapid increase in industrial output, and an even bigger boom in retail trade in this country. While employment was very full and prosperity generally widespread, this began to bring its own problems towards the end of 1954 as exports failed to keep pace with rising imports and as factories began to reach the limits of their capacity. Nevertheless, profits benefited from the upsurge of activity and the relative thaw in dividend payments was ended. Genuine Savings Between 1953 and 1954 the continued profits of 2756 companies of all sizes and types rose from £1,501,000,000 to £1,663,000,000. More important than this increase of oyer 10 per cent, was the fact that during the period from June, 1953, to September, 1954 —which covers a full trading year for virtually all those companies, prices were unusually steady. This means that the increase in profits was a genuine increase in earnings, and owed relatively little to inflation. More significantly still, the gain in profits showed an acceleration from quarter to quarter until in the last three months of 1954 the companies publishing their accounts then showed an increase in profits of 14 per cent, over their previous year. In June. 1953, the average net dividend payment had been 9.6 per cent., and the 2756 companies covered by the analysis made by the “Economist” paid out between them about £135,000,000 net of tax. Last year the rate of payment rose to 10.4 per cent., and .as profits earned increased to £1,663,000,000, shareholders received just over. £170,000,000, a net increase of over 25 per cent. The gains in share prices owed a great deal to the combination of improved earnings and a more liberal dividend policy. In addition, the activities of “take-over” bidders also had an important influence in pushing up the value of shares of companies whose assets, particularly property, were undervalued in their books. However, while the trend of shares was upward, buyers showed discrimination among various industries, reflecting their relative prospects and achievements. Between the end of 1953 and February 24, 1955, the rise in the value of industrial shares was just over 28 per cent. But individual industries showed considerable variation, as the

*No 1946 figure available; December 31, 1953=100 So, a lucky investor in radio shares can show a profit of £B5 on £lOO invested at the beginning of last year, in spite of the drop from the peak. A buyer of store shares can still show an average gain of £25, though he could have had a much bigger windfall if he had sold out a month ago. The pattern in the table shows the strength of industries catering mainly, for home demand; and it is the prospects for these which should have been dimmed by the Chancellor’s recent moves—particularly those trades where hire purchase finances a large proportion of sales. It should be emphasised that the date of February 24 hi the table was the low point of the break in prices, and that the average level of values has recovered to some 5 per cent, above the figures shown. Will the Boom Continue? Does this mean that shareholders are now deliberately ignoring the warning signals being flown from the Treasury and the Bank of England? Is there sufficient solid fuel to keep the boom going in spite of the change in climate?- The market correctly anticipated the stemming of the sterling area’s balance of payments deficit • J? c e « up i urn .x f dom estic retail trade in 1952. Is it really ignoring the present position and, if so. does this

mean that we can take the market', estimate of the economic situation >» its own valuation? 1

The boom in Stock Exchange has been largely due to big increasS in profits reported and dividends mH out by companies in nearly every Un* of business. Indeed, prices of man? shares have been pushed up as much by anticipation of bumper results tn come as by actual recorded profit* This has meant that, even allowing for the general rise in dividend nav ments, the yield on industrial sharL has tended to fall. The differenced yield between the gilt-edged stocks and industrial securities narrow*! appreciably during 1954. The rise in Government stocks never assuniS anything like the pace of the indn? trial boom, and the peak gain i n this section in 1943 was under 6 per cent Since recent changes in bank rate th* index of gilt-edged prices has droonS back nearly 5 per cent, and it is now below its level at the end of 1953 The corresponding fall in indusfrSi equities was over 10 per cent but with the subsequent recovery, the yield on industrials is now still cloJ to that on gilt-edged stocks.

This is an important point, becaut* the relationship between industrial shares and gilt-edged stock is a si fi . nificant indication of the markeri confidence. Equities are naturally J more risky investment than gih edged, and usually their respective values reflect this difference in risk with industrials yielding a higher interest rate.

The continuing narrowness of the differential between the two types erf yield indicates that investor! in equities are still expecting further increases in distributions to be made by companies when they publish their reports in coming months. Still Higher Dividends?

In view of last year’s unprecedented prosperity this seems to be a wellfounded expectation. We have not yet had company reports covering the busiest period of last year’s retail boom, and this means that higher dividend payments will almost cer tainly be forthcoming. This does not mean that share values will also move on to higher peaks; the present levek of prices seem to have taken the prospect of higher dividends into account At the same time there is complicating factor: if bank rate remains at 4J per cent, for any length of time, interest rates for short-'tenn credits will inevitably rise further and the resultant increase in yields of shorter-dated Government stocks should compel some recons, -eyatioi) of the yield basis of industrial shares Two important factors, have much influence on the future course of the stock market: the future level of bank rate and the estimate which investors form of the present economic situation. The ChancsMor’s recent moves were aimed at cutting back both consumption and investment in the belief that we were again on the threshold of inflation. However, investors generally seem to have taken these moves a little too lightly, assuming that we now know the worst, that the next change in bank rate must be downwards, and that over-consumption can be cured without anybody actually having to cut down consumption. The figures of the gold and dollar losses in February hid a slight dampening effect, but the general impression is that the stock markets are still tending to ©veroptimism and would need a shock in the shape of serious balance-of-psy-ments deficits, a really stiff Budget, or yet another increase in bank rate to bring them completely back to reality. True, the drop in values, short-lived though it was, was enough to hit some speculators hard, and some cuts in consumption will have been made by the sudden need to cancel orders for luxury goods, from minks and diamonds to washing machines and television sets. Need for Moderation However, realisation of the present precarious poise of the economj should do something to bring sobriety back to the markets. There is another factor which may help in this direction. It now appears probable that any tax reliefs in the Budget will be largely angled to stimulate exports and essential re-equipment of our industry. This could have the effect of inducing company chairmen to moderate the sums they propose to pay out to their shareholders. The record of companies reporting in the first two months of 1955 showed an appreciable rise in profits compared with their previous results: 251 companies reporting in January and February reported profits ot £196.000.000 against £184,000,000 4 year before, and the ordinary dividends paid rose from £23,000,000 to £26,000,000. This is only a anal sample of public companies—about ? per cent.—and is distorted became a high proportion of iron and steel companies is included in the figure but it does illustrate the trend. wh« appears very probable is that while reported profits will continue to advance as the year goes on. the rate <rf increase may start to fall off by tie autumn, and that while dividend ments will b? un in total, they represent a declining proportion a profits a? earned. v < • This all suggests that further sharp advances in Stock Exchange valuo would not be justified on all the available evidence, and speculation on further big dividend increases, beyond those already discounted, would be most unwise. It is noteworthy thlt the big investors have not yet reentered the marke* as buyers, which suggests that even present levels may be a little high. Certainly the prospects for floating new issues are poor al present; and it is unlitely tet top .year’s total of £471,000,000 fomhß the City will be approached utoton the nationalised industries inefej* their borrowing substantially. So ijto market seems to have already couraged some private investment* if consumption can be held back • well, the Stock Exchange will Jg playing a leading role in the bewto against inflation. .

following table shows:SHARE VALUE INDEX December 24, 1946=100 Dec. 31, Feb. 24, Gain 1953 1955 %' Aviation .. 132 180 36 Breweries .. 59 65 9 Building materials .. 115 134 17 Chemicals .. 103 138 34 Cinemas, theatres .. 100* 158 58 Electrical equip. .. 99 140 41 Engineering .. 100* 133 33 Food and tobacco .. 94 122 29 Motors .. 97 150 54 Newspapers .. 112 142 26 Plastics .. 45 63 43 Provisions .. 77 101 32 Radio .. 88 160 83 Retail stores .. 141 178 25 Shipping Silk ana .. 97 148 52 rayon .. 69 77 11 Wool and cotton .. 90 89 -1 ■ Total .. 93 122 28