Shares: A true blue-chip Budget: Investors have reacted bullishly to the tough line taken on government spending

Click to follow
The Independent Online
BUDGETS often give share prices a push in the direction they want to go anyway. That has certainly been the case with Kenneth Clarke's first effort, which saw share prices rising almost from the moment that he stood up at the despatch box. This latest phase of the bull market has only just begun and investors should not feel they have missed the boat. Bull runs such as the current one don't end until they have amazed almost everyone by their duration and extent. We are a long way from that point. Late November and early December have often proved good times to buy for a seasonal run-up in prices that can easily last well into the following spring.

Some readers may be surprised at the impact of the Budget, since the Chancellor didn't seem to do that much. But there are a number of reasons why investors have reacted with such enthusiasm. First, it is clear that the Tories are at last serious about restraining public spending. The public sector is grotesquely inefficient by corporate standards, so dramatic results should be readily achievable. Second, they have the perfect front man in Kenneth Clarke, with his left-of-Tory-centre reputation, his often-stated enthusiasm for the welfare state (which he is now beginning to dismantle) and his ability for stating home truths bluntly without giving offence. Third, it is now being realised that taking the delayed-action effects of Norman Lamont's last Budget together with new tax measures, Mr Clarke's Budget probably adds up to the fiercest package of tax increases in the peacetime history of this country. The resulting massive repositioning of fiscal and monetary policy should permit the latter to be eased even further. This creates a dramatically bullish set of circumstances, because Mr Clarke must have a recovery for his strategy to work, but can only stimulate that recovery by allowing interest rates to fall further. I believe they will fall and that investors should be moving aggressively to lock in yields around 7 per cent on long-dated gilts. But the real action now is going to be in equities.

The UK bull market is taking place against the background of a strong bull run in most of the rest of the world. My simple rule is that bonds boom first and shares follow. We are now at a relatively mature stage of a spectacular worldwide bull market in bonds. But the corresponding bull market in equities, though it has certainly begun, is substantially still to come. Share prices have huge potential as money continues to shift out of low-return savings accounts in search of the higher returns available from the world's capital markets. Allied to major technological changes, the collapse of communism, the opening up of vast new markets in Asia and South America and the massive savings flows as people live longer and so accumulate more wealth, the prospects are for a bull market in shares perhaps greater than anything yet seen. Investors worry that shares are already expensive. But average UK dividend yields in the comparably low-inflation 1960s fell to below 2.5 per cent against around 3.5 per cent currently.

Nor does a prospective p/e for UK equities generally around 15.5 seem too expensive.

Shares will not go up in a straight line and would certainly suffer a hiccup if US interest rates were to rise. But the equity boom would only be aborted by rising inflation leading to higher bond yields. That looks a remote threat at present. Governments need foreign capital to finance budget deficits and simply cannot allow their inflation rate to be too different to that of other countries. The West also now faces fierce competition from low-cost Asian rivals, leading to the lowest wage increases in a generation and sustained increases in productivity. All the signs are that the developed world is in the grip of fierce deflationary forces that are going to keep inflation subdued for some years. The oil price, for example, plumbs new lows almost daily.

The problem for savers accustomed to the safety and predictability of a building society account is that shares are complicated, volatile and risky. Also, market spreads and commission mean the first effect of buying them is that you have less money. But it is possible to combine the safety of a building society account with a decent and rising income and all the capital gains potential of equities. Stick to a large portfolio of well-chosen big companies.

I have chosen 20 leading shares (prices in brackets): BAT Industries (522p), Blue Circle Industries (337p), Carlton Communications (834p), Williams Holdings (341p), Marks and Spencer (455p), Kingfisher (730p), SG Warburg (887p), Wolseley Group (793p), De La Rue (814p), Glaxo (6951 2 p), Pearson (586p), Shell Transport & Trading (7011 2 p), Barclays (609p), Land Securities (757p), Reuters Holdings ( pounds 17.33), RTZ (7221 2 p), Scottish & Newcastle (538p), Sears (127p), Thames Water (547p) and Whitbread 'A' (561p).

Invest pounds 10,000 in this group and I believe that the next few years will produce steadily rising income and substantial capital gains with very little risk.

(Photograph omitted)

Comments