Finance
British Industrial Prospects
A STAGE has now been reached in the industrial share market when the influences affecting security values are easier to discover than to interpret. After advancing strongly during the past two years, quotations have sustained a set-back which, if not the first the market has had to face, is certainly remarkable for its coincidence with trade statistics and other indications suggesting the possibility of a change in the upward trend of British industrial activity. Investors in industrial securities, whether they hold ordinary shares or prior charge issues, have the difficult problem of deciding whether the recent reaction in prices marks a definite change of tendency, or whether the ultimate outlook is favourable. Is it a case of reculer pour mieux muter, or is there a probability of a long-term reaction ? The question is of interest to the genuine and more or less permanent holder of shares in industrial concerns, for the answer should provide a basis for the framing of an investment policy.
Since no correct view of current possibilities can be obtained without some reference to price movements in the past, it may be well to review the general level of industrial share prices since recovery began. Between May, 1932, and last month, industrial share values rose by something like 75 per cent., and it has been a common- place in the City that prices were running well ahead of trade recovery. There was nothing alarming in this phenomenon, in view of the general habit of the Stock Exchange of discounting events in advance, but the natural result of discounting the future is a severe set- back in quotations at the first breath of suspicion that the circumstances which have been discounted may not arise. This accounts sufficiently, as far as the history of industrial prices is concerned, for the set-back of over 8 per cent. of 1932 values which has occurred in industrial shares during the past few weeks.
REASONS FOR REACTION.
The reasons which may be put forward for the reaction are many and varied. Some, like the passage of the Stock Exchange Control Bill in the United States, are purely speculative in their influence, their major effect being upon speculative sentiment. Others, including the resuscitation of the War Debt question, and the Dis- armament Conference difficulties at Geneva, have a more political flavour. Uncertainty as to the future of German trade and finance, and the evident discontent in the United States at the results of President Roosevelt's recovery campaign, are influences more nearly touching industrial conditions in this country, which cannot be expected to escape the effect of adverse developments in either Germany or America. Probably all the above factors have been among those contributing their quota to the decline in British indus- trial shares, if only because they have affected sentiment throughout the Stock Exchange. Their implications should certainly not be lost upon the investor. Of more immediate interest to the holder of industrial shares, however, is the ftict that the numerous indices of activity in this country are now far less unanimous than formerly in their suggestion of pronounced improvement. Taken as a whole, unemployment figures, retail and over- sea trade statistics and railway traffics indicate that although industrial activity remains above the level of last year, the rate of expansion is less impressive than it was a few weeks ago.
BUSINESS POINTERS.
The employment returns have probably been the best of any internal statistics recently; the figures show that the absorption of workers into industry has been proceed- ing at an undiminished rate. Oversea trade has also been holding its own, but the money value of retail sales in April, according to the Board of Trade Journal, was down by 3.2 per cent. against April, 1933. This was the first decline against the corresponding month of the preceding year to be recorded since September last. Railway revenue from goods traffic, although fluctuating consider. ably from week to week, in comparison with last year's figures, seems to be making no pronounced advance, and bankers' advances to customers, which may be taken as another useful trade indicator, show a decline for May for the first time since the beginning of the current year, the total average of advances of the London clearing banks for last month being down by £3,884,000 to £754,834,000 compared with the average for April. How far are these internal trade pointers to be taken at their face value as confirmation of the view that British trade improvement has been due largely to ephemeral influences which are now working themselves out ? British industry has undoubtedly received some impetus since 1981 from the depreciation of sterling and from the imposition of tariffs. The effect of both these factors may well have been to give industrial operations in this country a fillip which, in the ordinary course of economic events, could only persist for a relatively short time.
INTERNAL TRADE ACTIVITY.
One effect of tariffs and a depreciated currency has been to make British trade activity largely an internal affair. Possibilities in this direction may be far from ex- hausted, but internal trade cannot entirely replace over. sea business as a major contributor to the country's prosperity, and in the absence of a world trade improve- ment, which apparently presupposes a relaxation of present trade barriers, British industry seems hardly likely to regain its full measure of prosperity. If, however, there are ample explanations for a lull in the expansion of British industrial operations, there is at the moment no reason to suppose that the movement has definitely come to an end. A pause in any upward trend is not in itself an unfavourable development, and when, as in the case of recent British industrial recovery, pro- gress has been part of an almost world-wide movement in the same direction, it should certainly not be discourag- ing. Interest in this country has recently been so con- centrated on the internal aspects of trade recovery that there has been a danger of sight being lost of the definite turn for the better taken by industry in many countries besides Great Britain.
IMPROVEMENT OVERSEAS.
Statistics recently issued by the International Labour Office show that activity increased in every important industrial country of the world during the first quarter of 1934, and that even in the United States, although developments are evidently viewed with disappointment by American opinion, industrial activity was running at some 30 per cent. above the level of the corresponding period of the previous year. Unfortunately, restrictions such as tariffs, quotas and prohibitions are keeping inter- national trade at a greatly reduced level, and are thus tending to turn each country into a water-tight compart- ment. But the fact that industrial recovery is not con- fined to this country is the best possible guarantee that, recent internal statistics notwithstanding, there is a prospect of its continuance over a reasonable period. In the Stock Exchange, as in industry, a continuous upward movement, without a definite check from time to time, can generally be regarded as evidence of an unsound situation, and to this extent the recent set-back in indus- trial share quotations is to be welcomed. A short period of inactivity is certain to improve underlying market conditions by eliminating speculative influences, and should give the long-term investor an opportunity to observe the signs of the times and otherwise to take stock of his position. Up to the present, there has been little or no indication that British industrial activity has suffered more than a temporary check. But the time has obvi- ously arrived when even more careful note than usual should be taken of all the indices bearing on the industrial situation as- well as on the political and financial events which may affect trade. Close observation on these lines in the immediate future should give the key to the indus- trial outlook before many weeks have passed.
ALEC H. DAY.
(For Financial Notes, see page 950.)
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