Budget: no immediate market recovery likely

Post election euphoria on the stock market was very short lived with the F T Index falling particularly sharply after the Budget. Mr Healey's measures were badly received by the City as being hostile towards corporate profits. Earlier tax payments, a once and for all boost to Government finances, hardly helps companies which are, by and large, suffering from a squeeze on liquidity as they stock up for full time working on the diminished cash flow from a three day week. Apart from Budget measures the Government has now made it more difficult to obtain price increases, and this, coupled with higher raw materials and commodities prices must eat into profits and margins as the year progresses. As for the retail sector, share prices have sustained a higher than average fall following Mrs Williams' decision to make food and non‐food retailers trim 10% from their gross margin reference levels. In practical terms the requirement is not as stringent as it sounds because Price Commission statistics suggest that groups are, on average, some way below their reference levels already. Since retailers do not publish details of their gross margins it is impossible to predict accurately who the chief sufferers will be. The situation looks far worse for non‐food than food retailers. Volume in the food industry tends to remain fairly stable in most economic circumstances, and supermarket groups will probably gain from increased pensions and allowances for the less well off sections of the community, a higher proportion of whose income goes on food. For the non food groups, however, the situation on margins could be extremely serious. A department store, for instance, with traditionally high fixed overheads, and a larger payroll to sales ratio than the multiples will find itself squeezed between rising internal costs (predicted at a 16% minimum this year by the Retail Consortium) sharply falling volume in durables, and the erosion in terms of real spending power, of middle class incomes. Department stores tend to be highly geared both financially and in terms of overheads so it would be no surprise to City analysts to see profits in the sector tumble by a third or more. The multiples are in a slightly better situation, with wages and other costs taking a smaller proportion of gross profit, but if internal costs rise by more than the sterling value of turnover profits here could be down too. The retailing sector has traditionally been one of the most defensive in terms of stock market investment, commanding a good premium on prices of industrial shares. During an inflationary period when manufacturers found it difficult to pass on cost increases retailers have managed to retain their gross percentage mark up, with the cash profit, even in times of nil volume growth, still increasing, providing a hedge against inflation. Now the Government has put a stop to this situation. What long term investors have to bear in mind is the impact that Government intervention or political sensitivity have had in other sectors, notably banks and property companies, where stock market sentiment has been badly shaken. Given the political importance of prices it is hard to envisage a situation where controls, once imposed, will ever be completely lifted. So it is difficult to see retail shares in the forefront of any stock market recovery.