FINANCE AND INVESTMENT
By CUSTO.
IT was not to be expected that the advent of a Socialist Govern- ment with an effective working majority would leave the stock markets unscathed. Investors, and more, especially the profes- sional and semi-professional type who are in the habit of taking short views of their holdings, dislike uncertainty and prefer to be reasonably liquid when, as at present the outlook is suddenly clouded by political changes. One need not be surprised, there- fore, that prices of industrial Ordinary shares have suffered a sharp setback. The forecast made here on July 27 that a Labour victory might precipitate a fall of anything between rip and 15 per cent, has, in fact, proved very close to the mark.
FUTURE OF INTEREST RATES Investors will naturally ask: How much of this fall is justified and what is the longer-term prospect now that the first impact of nervous selling has taken place? I think the best way to attempt an answer is by considering the position of three invest- ment groups—gilt edged including all well-secured fixed interest stocks ordinary shares in industries scheduled for nationalisation. and Other ordinary shares. On the question of gilt edged values the market has already delivered its judgment. After a momentary shudder immediately following the election result gilt edged securities have moved steadily upward to a level at which Old Consols, the leading irredeemable loan and therefore the best barometer of opinion concerning long-term interest rates, stands at its highest price since November, 1936.
Support has been based on the argument, which I think is sound, that so far from being jeopardised by the change in Government, cheap money will be easier to maintain under a Labour than a Conservative regime. As is well known, Labour is likely to retain controls almost for their own sake, especially over the direction of investment, and that will lighten the task of the Treasury in holding interest rates down. Then again, the Government's socialisation, housing, health and educational pro- g,rarnmes will involve heavy borrowings which will put new emphasis on the importance of low money rates. A reduction in Bank Rate from 2 per cent, to i per cent, with a modest fall in the charges 'for Treasury Bills and Treasury Deposit Receipts seems to me to be well within the bounds of possibility in the not toc distant future.
NATIONALISATION SHARES
When we come to nationalisation shares, which I take to include Bank of England stock, coal, gas and electricity and railway securities, much more difficult questions arise. Here it all depends on the interpretation given to "fair compensation," as has been promised by Sir Stafford Cripps and other Government spokesmen. Will the basis be average earnings over a pre-war period, average dividends recent market quotations or some valuation of assets? I do not know the answer. What is surely relevant, however, is that the Government can scarcely be anxious to infringe the rules of fair play to the point at which new capital investment from the private investor will simply not be forthcoming. In my view, current quotations in the groups I have named have fallen to levels which, by and large, discount the political risks adequately. Much the same can be said of such "near-nationalisation " groups asAron and steel, banking and insurance. The risk of State-acquisition it much more remote, and in the meantime I should not expect control to function so vigorously as to make the shares oVer-valued at to-day's levels.
EQUITIES AND TAXATION
What of the general run of ordinary shares in stores, breweries, electrical equipment, radio and so on, extending to the foreign rail, commodity and mining groups, which may still be expected to
represent the equity-in private capitalist enterprises? Here I think we must keep in mind the aim of the new Government to ensure efficiency with the minimum of profiteering. The outlook is obviously less promising now than it would have been in, a Con- servative regime, but how much? According to the pessimists, very much indeed. I wonder whether they are right. After all, the lot of the worker is dependent on the Government's success in achieving full employment, and that can scarcely be hoped for if capital is to be so scurvily treated that it decides to sulk. Altogether, while I do not look for any strong upward movement in home industrials, I shall be surprised if the announcement of Labour's detailed pro- gfamme causes any fresh fall below recent levels.
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