FINANCE

THE RALLY IN GILT-EDGED SECURITIES

THE slump in Atherican securities and in commodities and, indeed, the general depression in the City during the last few weeks, have been relieved only by a considerable rally in gilt-edged securities. The rise in British Government stocks, in particular, has been so pronounced that it is not surprising that a good many are asking whether we are about to witness a return of Government Stocks and kindred securities to the extraordinarily high level which was reached in 1935. It will be remembered that in that year Old Consols actually touched 941 and, to quote another instance, the 31 per cent. War Loan reached its peak of Ito/. Since then there has been a material set-back due to some extent to anticipations of dearer money, which have not been fulfilled, and also to some extent to the diversion of interest from gilt-edged stocks to the more speculative descriptions. In the following brief table I show the highest and lowest points touched by representative Government securities during the present year, together with present prices, while the two outer columns show respectively the recovery from the lowest of the, year and the fall from the highest :

Rise Fall

1937. Present from from

Highest. Lowest. price. Lowest.

Consols 24% • •

841

73

761 34

4% Consolidated .. 113 1051 II01} 5* 24% Conversion • •

I0I*

941 971 34 41% conversion .. 108 1044 1071 21 5% Conversion .. 117/ III* 1131 21 4% Funding 31% War Loan ..

.. 1161 1054 109 991 1121 31 totikad. 2* India 24% ..

72 62

6 7 5

India 3% ..

854

741

805 1

B. of E. Stock

3764

328 341 13

REASONS FOR THE RALLY.

No small part of this recovery from the lowest point of the year has taken place during the past few weeks, and in the main has been due to the following causes—first, to a recognition of the fact that fears of dearer money have not been fulfilled, and to a growing impression that cheapness of money is likely to continue for a lengthy period ; second, the sharp fall in American securities and in a lesser degree the fall in Home Industrials has led to a reversion of the tendency referred to above for holders of gilt-edged stocks to exchange into the more speculative securities, and this tendency has probably been increased by the anxiety with regard to international, developments, an anxiety which has also played a considerable part in the general depression in the City.

PRIOR CHARGE STOCKS.

It would be rather difficult to say how far the recovery in Goierninent securities has, up to the present, been assisted by purchases by the general investor or how far a few btiying orders by banks and other financial institutions

ENGLISH RAILWAY PRIOR . , 1937.

Highest. Lowest.

Gt. Western 4% Deb; 1134 • 1024

Gt. Western 50/ Deb. 1361 1224

Gt. Western 5% PL . 127 108 L. & N: E. 3% Deb. - 84 74

L. & N. E. 4% Deb. X074 984 L. M. & S. 4% Pf. .. 108 991

L. M. & S. 4% PL . . 924 794 Southern 4% Deb... i t2 Ica 4

Southetn 5% Deb... 1354 1231

Southeen-5% Pf. ; .- 126 k - rosfi-- CHARGE STOCKS.

Rise Fall

Present_

r from from price. Lowest. Highest.

io8 54 • - :51

' 12,8} 54.: .

ii8 . In • .,9 . 773 , 7

1024 - 4 44

104 41 4 _ . 83 • 34 94

107 5/ 5 Ira . 4 84 - 1144. Hit ' 1 1 coming upon a limited market have been responsible for the movement: On the whale; I believe thal tr 'to-- the present the recovery must be attributed to comparatively few buying orders coming upon a _limited market, and the raising of-prices

. Highest. 84

2 At- 3 it

I

31 4 5 54 354

by jobbers, so far from prompting sales by existing holders, has revealed a marked scarcity of stock. At the same time, ordinary investment buying has increased during the past few days, and from the preceding table of movements in prior charge stocks of English Railways it will be seen that to some extent; at least, the Debentures and Preference stocks of the Railways have responded to the upward movement in Government securities.

Acrum. BUSINESS SMALL.

In the table of Government securities it will be seen that in the case of the shorter-dated securities the recovery from the lowest of the year is more pronounced than the fall from the highest, though this is not the case in some of the long- dated stocks, Old Consols, for example, having recovered 3/ from the lowest, but being still 81 points below the highest of the year, while in the case of Bank of England Stock the' recovery from the lowest is about 13 points, still leaving the present price about 351 points below the highest of the year. In the case of the prior charge stocks of English Railways, present prices with few exceptions mark a heavier fall from the highest of the year than the recovery from the lowest, and I am inclined to think that this to some extent is an expression of the fact that the actual investment buying on the part of the public has been comparatively slight.

In considering whether we are about to witness a further pronounced rise in gilt-edged securities, there is another factor which has to be borne in mind. That the recent slump in commodities and in American securities is due to a very real set-back in trade on the other side of the Atlantic T think there can be little doubt, and while it does not follow that depression in American trade necessarily, foreshadows a decline in our own trade activity, the tendency is a little in that direction. It is possible, of course, that through some fresh action on the part of the Executive-in America there may be a quick recovery of confidence in that country, in which case, no doubt, there will also be a recovery in prices of commodities and American securities, with a stimulating effect upon markets here. Meanwhile, however,- and while by no means supporting those who are fond of predicting slumps, I think it should be recognised that while activity in those trades in any way -affected by rearmament expenditure continues to be as brisk as ever, -some other trades are also suffering a moderate reaction.

The fall in commodities has exceeded every expectation, and, while its favourable effect upon costs of production- and, incidentally, upon the cost of the rearmament programme,, may be welcomed, the fall must have occasioned some severe losses to holders of the commodities. Last Monday the price of tin fell to the lowest point (£175 per ton) touched since 1933, that price, moreover, comparing with £235 los. a year ago. There is little change in the price of wheat compared with this time last year, but copper shows a fall on the year of nearly £8 and zinc and lead of about 3os., and over £5 respectively. Rubber, too, which at one time was inclined to forge ahead, is now quoted at ab-out per lb. as against 8d. per lb. a year ago. Some months ago, when commodities were rising sharply, the advance was considered to be an argument in favour of somewhat dearer money, and presumably, therefore, the very sharp fall, together with any trade reaction, is not unnaturally regarded as an influence operating in the opposite direction and increasing the prospect of some further improvement in gilt-edged stockS, though for the reasons I discussed last week it seems rather doubtful whether these are likely to return to the level of the high prices of 1935. Moreover, there is always the possibility of any revival in the more speculative markets restraining the advance in gilt-edged securities, and on the whole I favour steadiness rather than a further big .rise in Government Stocks. ARTHUR W. KIDDY.

(Financial Notes on page 872.)