New Year Prospects
Finance
WRITING a twelve-month ago concerning market pro- spects for 1936. I said : " I believe that while the prospect for Investment stocks may be moderately good, the outlook for certain classes of Industrial shares is better." This view, I am glad to see, has now been amply con- firmed by results. The valuation of 365 representative Stock Exchange securities by the Bankers' Magazine shows that while the market values of 87 fixed interest stocks rose by about £54,000,000, or 1 per cent., there was an appreciation in market values of variable dividend securities of no less than £317,000,000, or an average gain of over 14f per cent. In the fixed interest group the rise in British Government stocks was only fractional, but in the speculative groups Foreign Railways, including Argentine descriptions, rose by over 70 per cent., Iron, Coal and Steel shares by 41 per cent., Oil shares by 45 per cent., Rubber shares by '57 per cent. and Copper Mining shares by 58 per cent. Cheap money and active trade have been the prime factors during the year offsetting the influence of disturbed political conditions abroad, and the year 1936 having closed under favourable con- ditions—so far, at all events, as home affairs are con- cerned—it remains to be seen whether there is good ground for- expecting these • favourable conditions to extend into the New Year.
How PRICES HAVE RISEN.
Taking, for the moment, a view not so much for the whole of 1937 as for the first half of the year, I think there can be no doubt that all the indications favour not only a continuance of, but an increase in, trade activity, and I say that, not overlooking the possibility to which I refer later of money rates hardening as the year proceeds. As noted in another column, the feature at the close of 1936 was the continued rise in prices of commodities so that at the moment of writing (December 29th) Wheat stands at 10s. per 100 lbs. compared with 6s. fiid. a year ago, Cotton at 7.10d. per lb. compared with 6.41d., Rubber at 11-Ad. per lb. as against 6176d., Tin at £234} per ton against £2171. while Copper is priced at £49A per ton against £353 a year ago.
INTERNATIONAL TRADE.
Later on there wilt probably come a time when the rising costs of production consequent upon the higher prices of commodities will begin to affect the profits of manufacturing and industrial concerns, but for the moment it is more probable that the greater prosperity accruing to foreign countries producing the various commodities will lead to increased purchases of our goods on foreign account, so that we may at last see some expansion in our export trade, and an expansion in inter- national trade, as a whole, is almost bound to have a good effect here. I think, therefore, that for the first half of the year, at all events, and pOssiblYlor alOnger period, increased activity of trade may be an outstanding feature, especially having regard to the fact that Government outlays in, connexion' with the Natiorial:Defence pre- gramme are likely to be very large during the year.
HoPdg, RAILWAY Ouv,o0K..
To some extent, of course, these expectations of active trade havebeen anticipated in the general rise. which has already taken • place in Industrial sharei, hut, having regard to the improved conditions of the past year, I should expect them to be reflected in favourable reports and increased • dividends by many of the Industrial companies during the new year, while so long as the upward movement in security prices 'continues an impetus will be given to spending power on the part of the community, an impetus which may be increased by a further reduction in the numbers of unemployed. More- over, unless Labour demands should assume an unreason- able form, holders of Home Railway-stocks should benefit from a farther increase in railroad traffic-reeeipts; while the Companies will also benefit by the recovery of previous excessive. rate charges.
GILT-EDGED STOCKS.
I must confess,, however, that I find it difficult to anticipate a fuither general appreciation in British Government stocks and. in all stocks of the trustee type. The main force responsible for the great rise in those securities some two years ago, namely,. abnormally easy money, has already shown some signs of diminishing, and if expectations of a still further rise in prices of com- modities, with a further increase in trade activity, are fulfilled, it is difficult to believe that money rates will not, in some degree; be affected as the year proceeds, for it is ahnost inconeeivablethat-money should be the only commodity failing to advance.
THE NATIONAL FINANCES.
In view of heavy borrowing in connexion with the National Defence programme, the • authorities will naturally be anxious to keep money. rates as low as possible and to maintain prices Of existing Government stocks. MoreOver, the policy of cheap money is one which has been adopted throughout the Empire and in the United States. Nevertheless there must be a limit to the power of policies, even when wielded by Governments, and it seems impossible that the general rise in commodity prices and in trade activity should not leave its mark upon the course of money rates. Not that I expect any violent change in rates during the coming year but rather a gradual hardening, though however gradual and however slight the rise in the value of money I should expect its effect would be at least to restrain any rise in' Government securities even if it did not cause a slight decline. Not only so, but even a very small advance in money rates would add to the cost to the Government of its issues of Treasury Bills, and a saving in Debt Service has been the most favourable feature of past Budgets.
Nor is it easy to discern in Budget prospects for the coming year any feature likely to stimulate gilt-edged securities. On the contrary there is the prospect of some further increase in the Income Tax and a clearer revelation of the huge cost of the rearmament programme. So, far as industrial and more speculative securities are concerned these influences may poisibly be offset by the other factors to which I have referred earlier in this article, but the case is different with the Fixed Interest securities, and I am afraid that to the retitier, class and to thosewith fixed incomes higher Nice's of commodities, increased taxation and the generally higher cost of living may bring some inconvenience in the New Year.'
Hoviever, it is the situation as a whole which we are considering, when noting the prospects for 1987 and, always barring political catastrophes, it is impossible not to take a favourable view of the outlook at all events
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