Tuesday's statement reinforced all my theories:
That a further decisive drop in gilt yields and interest rates lies ahead.
That investors should be locking in returns on safe higher- yielding shares such as utilities, even if tax changes have reduced the returns to higher-rate taxpayers and tax-exempt institutional investors.
That the attractions of growth shares and smaller companies have been strengthened.
That a cracking equity bull market is underway.
The Budget is good for gilts because the Government has shown that it is prepared to raise taxes significantly to control its deficit. Not only is that a change in attitude from the 1980s, but there is another implication - the strategy will come disastrously unstuck if the economy does not recover. The only mechanism it has for righting continuing deflationary tendencies is further falls in interest rates. Gilts reacted badly to the Budget at first because there was no immediate news of base- rate cuts and next year's borrowing requirement was raised to pounds 50bn. But second thoughts should be more bullish.
This focusing of policy on interest rates should be good for interest-rate sensitive stocks. Companies such as the hire purchase trio Provident Financial at 794p, Cattle's Holdings at 106p and London Scottish at 79p are already in strong bull markets, but these should have further to go as the falling cost of money boosts their profit margins. Smaller companies reaping similar benefits are S&U, the loan specialists, at 295p and Secure Trust, the Birmingham-based home money management group, at 518p.
One company that aroused excitement in response to the forthcoming rise in heating bills was Sheffield Insulations, one of my New Year nap selection at 108p. It is far and away the market leader in the distribution of insulation products, with a national branch network and a market share of over 30 per cent. The shares have already risen sharply from a low of 75p last autumn. Last Wednesday the price climbed from 148p to a peak of 175p before settling back to 163p. No fireworks are expected when it reports next Wednesday, with the company's stockbrokers forecasting profits of about pounds 2.5m, compared with pounds 1.5m in 1991 and a peak of pounds 6.2m in 1990.
But Sheffield Insulations is a tightly run operation which has used the recession to expand its branch network with a series of acquisitions. Two years of flat volumes and falling prices have depressed profits, but they will soar when demand and prices recover.
If the Government shows the same determination towards curbing spending in November as it has towards controlling the deficit, it would be good news for companies that help public bodies operate more efficiently. The classic example is Capita, the public sector management consultancy, which recently reported a 23 per cent increase in earnings per share and announced a 2-for-1 bonus issue.
Since 1984 Capita has grown, via a management buyout and a flotation, from a CIPFA department with two employees to a quoted company valued at over pounds 70m with 860 employees, a five-year record of 30 per cent compound growth in earnings per share and analysts' expectations that current-year profits will exceed pounds 5.3m against last year's pounds 4.4m. The shares look a superb lockaway investment at 477p, even though the prospective p/e, on what may prove a cautious profit estimate, is a demanding 20 plus.Reuse content