Finance—Public & Private

The Rise in Investment Stocks

DURING the past fortnight quite a remarkable rise has occurred in British Funds and other high-class investment securities, so that in many, if not most, instances prices now stand at the highest level since the recovery in British Funds set in a year or two after the conclusion of the War. For it is always useful to remember that the lowest quotations touched were not during the War but during the period of continued inflation and extravagant National Expenditure following after the War while the biggest rise in gilt-edged securities, apart from the movement which is now taking place, occurred in and around the year 1923, when following the breakdown Of the premature boom of 1920 there was a prolonged period of cheap money. For the most part, however, the quotations of 1923 have now been passed, and the following table shows how considerable has been the rise in leading investment stocks when compared with the lowest points touched last year, though, in passing, it should be noted that still lower points in some of the India Loans were touched during the present year :

BRITISH FUNDS.

Stocks. Lowest Oct. 20th, in 1929.Rise.

Do. 4% .. .. 811 1.

901 91

Consols 21% .. .. 62 61 War Loan 5% • •10441 5} Do. 41°.; .. :: 9926* 1021 101

• Do. 4% .. Funding Loan 4°), Conversion Loan 31% • • .. 72 A

Victory Bonds 4°), L'g • • .. 90

• . Do.

•• •• 99931

.. 821 1001 92f 961

80) 101

111

741

1 } Irish Land 24% .. .. .. 55 1(1211

8 41% 91 Do. 3% .. .. .. 601 66 51 Local Loans 3% .. Bank of England Stock • • .. 2311 2663:111: 61 241 .. .. 60

Transvaal 3•' 1923-53 .. 8(1 8 3 India 21% ..

.. .. 44 46 Do. 3% .. .. .. .. 501 661 2 5 Do. 31% .. .. .. 60 641 41 Do. 51% .. .. .. 981 1021 4/

- Do. 44% 1950-55 • • .. 801 861. 6 Do. 41% 1958-68 • • .. 801 871 61

Metropolitan Con. 21% • • .. 671 751 8 Palestine 5% .. .. .. 991 104 41 London County Council 21% .. 494 55 51 Do. 3% .. 60 651 54 Do. 31% .. 70 764 61 Do. 5%, 1940-60.. 991 1031 41

Corporation of London 5% .. 991 Port of London 3% " A " .. 58 1 01

Metropolitan Water " B " .. 611 61 66°471 5 Do. 4% " B " .. 761 841 81 Ulster 41% 1946-75 .. .. 88 951 71 • Ex div.

'WILL. TIIFI RISE Co FURTHER ?

When we remember the extent of this rise and the fact that at present levels long-dated Government Stocks arc beginning to give a yield of 4 per cent. to under, it is scarcely surprising that the genuine investor should begin to raise the question whether it is a case of his accepting the situation and investing quickly before Prices go higher, or whether he or she will do well to wait for an ultimate reaction. Those who are disposed to refrain from purchasing at the present level not un- naturally urge that it is quite possible even for gilt-edged stocks to rise beyond levels represented by intrinsic merits, and that, inasmuch as the present movement almost partakes of the nature of the boom, there may he need- for caution now on the part of the investor just as when in other markets of the more speculative char- acter prices have, been pushed up in boons fashion. Not o-nly so, but there are many holders of gilt-edged secu- rities who, prompted, in part, by timidity and, in part, by a belief that a rise was probable, acquired British Funds a few months ago at a much lower level, and such holders are wondering whether the present may not be an oppor- tunity for taking profits and for seeking re-investment in sufficiently • well secured stocks but of a less absolute gilt-edged character. Such considerations are, of course, stimulated also by a recognition of the fact that with an Income Tax of 4s. 6d. in the £, the yield on Government securities nowadays looks miserably small. To be precisei a- Government stock yielding, say, 4 7/16 per

cent. would mean a net yield of about 3 7/16 per cent. deducting tax, ' . . - . FACTORS OPERATING.

If at this juncture the reader should imagine that I am about to give a clear intimation as to whether gilt-edged securities have reached their zenith, and, therefore, whether he should at the moment be a buyer or a seller, I am afraid he will be doomed to disappointment. All that I can do is to offer a word of guidance based upon a consideration of the causes responsible for the present great rise in British Funds, leaving it to the reader to determine whether, having regard to the causes, there seems a likelihood of their continuance and of their expression in a further rise in investment securities.

CHEAP MONEY AND TIMIDITY.

The first and most obvious cause of the strength of gilt- edged securities is to be found in the low value of money rates. The investor with spare resources is not likely to rest long content either with his money earning no interest at all with the Banks or obtaining from 1 to If per cent., when a higher yield can be obtained from the best class of investment securities. Consequently, we get one force driving money into the investment markets. Granted, however, that the low rates of money have the effect of prompting the investor to withdraw money where it is earning a low deposit rate, it does not neces- sarily follow that the money would go into gilt-edged securities. Why not into something more speculative giving a higher yield ? Why not into some of the South American Loans or depreciated English Railway stocks where yields at present prices are exceedingly high ? It so happens, however, that the investor has had many unpleasant shocks during recent years. Trumpery new capital issues of the industrial type and flotations in some of the Hatry groups, to say nothing of the severe losses suffered through the slump in Transatlantic industrial securities, have shaken the confidence of the public for the time being in the more speculative markets so that timidity as well as other influences have combined to drive spare money into the investment markets. The timidity, moreover, is not based entirely upon the effect of recent Stock Exchange losses. The general conditions of political unsettlement and social and industrial unrest all militate against- a display of confidence which under normal conditions- would find its expression in more active trade and in more active purchases of industrial and semi-speculative stocks.

TEMPORARY INFLUENCES.

Then, in addition, we have at the moment another influence operating in the shape of the recant announce- ment by the Government of the repayment next January of about £75,000,000 in the 1 per cent. tax compounded Loan. This means that in January a large amount of money will be available for investment and, acting on the idea that much of the money will go back into similar securities, we have professional operators purchasing stocks in advance, expecting to obtain a speculative profit. Nor must omission be made of obvious attempts on the part of the Government to get British Funds to a higher level for Conversion purposes. The impending repayment of the Tax compounded Loan was doubtless intended to aid the upward movement in Government securities, and the Chancellor of the Exchequer seized opportunity at the recent Dinner at the Mansion House to hint in cryptic fashion the possibilities of a conversion of the 5 per cent. War Loan, although, having regard to its magnitude, the task must necessarily be a formidable one. • PARADOXES.

Having mentioned some of the . main influences responsible for the Present upward movement in British Funds and kindred stocks, the question which naturally arises is—whether these influences are likely to continue or whether there are signs of forces of a different character likely to operate in the near future. Incidentally, and in pa-;sing, it must be obvious that whatever other causes arc contributing to the rise in British funds, National prosperity or satisfactory state of the Exchequer are not among them. Yet, paradoxical as it may appear, the fact remains that for a time the effect of cheap money, no matter what the cause, may be greater than that produced by the actual economic situation of the country. Indeed, assuming that any revival in -trade prosperity were sufficiently pronounced to occasion dearer money rates, it is highly probable that British funds, instead of advancing, would decline. That, of course, is a phenomenon well known to those experienced in Stock Exchange affairs, but it is perhaps not so easily recognized by the ordinary investor. At present it must be admitted that there are few signs of any important change in the monetary position and it is upon that fact that bulls of gilt-edged securities are basing their chief hopes.

WHAT MANY ARE DOING.

At the same time it must be confessed that if the present causes making for cheap money and timidity, namely, bad trade, unprecedented unemployment figures, social and political unsettlement here and abroad, are to continue for a prolonged period, the outlook is a depressing one, however much it may cheer " bulls " of high-class investment securities or those desirous of achieving a Government conversion operation. I fancy, therefore, that a good many incline to the view that while nothing is more likely than a further early advance for a time in gilt-edged stocks, by reason of the influences referred to, the rise can scarcely he regarded as a normal or an enduring one. Those who hold that view are disposed at the present time to invest some small portion of unemployed funds in long-dated British Government securities, but to employ other portions in stocks where a full 5 per cent. can still be obtained coincidentally with adequate security, and this same section I think— very wisely, too, I believe—is disposed to keep a final portion of their balance free to acquire stocks in some other directions where, although the possibilities of a further decline are recognized, it is believed that chances are good for an ultimate recovery.

ARTHUR W. KIDDY.