Election Aftermath UNCERTAINTY UNLIMITED IN THE CITY OF LONDON?

Press, Volume CIII, Issue 30586, 31 October 1964, Page 14

Election Aftermath UNCERTAINTY UNLIMITED IN THE CITY OF LONDON?

IBy "LYNCtVS” of the •‘Economist”) (From the,“Economist" Intellijencr Unit.) There are reckoned to be about three million investors in Britain today. This includes about one and a quarter million holders of units in the fast-growing band of unit trusts—the British equivalent ot America’s mutual funds or open-ended trusts. There are, of course many million more indirect investors both as contributors to pension funds or as holders of life insurance policies. But it is the two million or so direct investors who have the biggest problems to face at the moment.

Recent experience would suggest that British unit trust holders (the total value of their holdings at the end of September was an impressive £450 million) are unlikely to be panicked into selling their units. Most unit trusts now claim to have few of the “in and out” type of investor and that most holders now accept unit trust for what they are: a way to protect against inflation through investment by experts in the widest possible range of shares. And these two factors, the wide spread of holdings and the investment skill of the unit trust managers, has usually ensured that units fall by much less than direct investments.

See-Sawing Prices

This is in fact what has happened in the last few days of sharp fluctuations in prices on London’s Stock Exchange. Uncertainty is bad for share prices and for months past share prices have been seesawing as political hopes rose and fell. As the public opinion polls predicted a recovery in the fortunes of the Conservative party share prices rose only to fall back again when the polls showed a swing back to Labour. All this was supposed to end on Election Day, October 15— but this is far from being so. The result of the election is one which many people feared, an inconclusive result with Labour returned with a tiny majority. This result is the second worst possible outcome for the stock market. (The worst would have been a tiny majority for the Conservatives: this would almost certainly have meant another election very quickly.) And while the new Government cannot last its five year term on such a tiny majority. Mr Wilson and his new ministers —now in power after 13 years out of office—will conceivably try to hold on as long as nossible. In the City of London two years is regarded as the outside limit for the new administration with Mr Wilson able to choose a politically favourable time to appeal to the country for a bigger majority.

Policy on Steel

The stock market reaction to the slim Labour majority has been mixed. At first it was assumed that the smallness of the Labour majority would mean the postponement of the controversial Labour plan for the renationalisation of Britain’s steel companies. Steel shares revived only to fall away again on suggestions that Mr Wilson was determined to carry through this part of the programme as an essential requisite of maintaining the party’s unity, so vital when it is working with a tiny

majority. And so steel shares —for so long the political counters in the London stock market—have continued to fluctuate sharply. The political uncertainties in themselves are enough to keep many investors out of the market and the pressing problems on the economic front strengthens the argument for caution. The problem was spotlighted on the day that Mr Wilson became Prime Minister in the announcement of the trade figures for September, which showed that Britain's trade gap widened last month to £lll million, the third largest on record. This was hardly the happiest present for the new Prime Minister and he could not be blamed for thinking ruefully that had these figures been published a couple of days earlier, Labour might well have got in by a more comfortable majority. On the other hand Mr Khrushchev's sacking and the Chinese atom bomb would probably have worked in favour of the Conservatives.

Closing Payments Gap Now the stock market is waiting with some degree of pessimism to see what measures the Government will think fit to apply to close the payments gap. The city

reckons that the first step will be to the International Monetary Fund for the 1000 million dollars of standby, credit And there are many who expect an early increase in Bank rate. The Labour party have talked much about bringing interest rates down but for the moment as a defensive measure they look British Government stocks—likely to move higher. And War Loan and the rest—have had some poor post-Wilson days with a fair amount of selling coming from abroad. Clearly the labour Government will stand or fall by its success in getting the economy out of the present balance of payments crisis. But the market’s dilemma is that if the new men succeed they will presumably be returned with a bigger majority and then the City is likely to see much more of the antiprofits elements in the Labour policy than are likely to emerge in the next few months. It is hardly surprising that many investors are treading warily at present —indeed in many cases they are keeping on the sidelines. The only part of the market to show any strength in Mr Wilson’s early days was gold shares. But this is largely dominated by Johannesburg which has its own political problems and risks.