20 DECEMBER 1935, Page 36


Are Investment Stocks Too High ?

THAT is a question to which I imagine few financial writers would be disposed to give a very definite reply. Never- theless, I am venturing to suggest one or two reasons why I consider that Government securities and kindred trustee stocks are, if not too high, at all events high enough. I suppose that those who might be inclined to oppose this view would urge that with no signs of dearer money, and with the Public being only able to obtain per cent. on banking deposits, investors must, sooner or later, be compelled to seek refuge in British Government or similar securities. It might further be urged that it is an open secret that Governments not only of this but of other countries are disposed to favour a policy of cheap money and higher prices of commodities as a stimulus to trade activities. That view is certainly borne out by the experience of recent years, but nevertheless I suggest that there is not only a good deal that is artificial in the movement, but much that is detrimental rather than helpful to sound trade activity.


It may be recalled that the great stimulus to a rise in Government securities was given by the British Govern- ment itself in the summer of 1932 when there came the dramatic announcement that holders of the 5 per cent. War Loan must either submit to exchange into a 3i per cent.. War Loan or have their Loan repaid at the end of 1932. Now, inasmuch as the whole of the War Loan then outstanding represented a sum of no less than £2,000,000,000, it is obvious that if the holders of the 5 per cent. War Loan one and all had refused to convert, the Government cduld only have paid off the Loan by borrowing £2,000,000,000 from the Bank of England, which in its turn would, of course, have meant a great inflationary movement. In recalling these facts it must not be supposed that I am criticising the Government for their action in 1932, On the contrary, it was a courageous and, on the whole, a wise act, but its excuse at that time really constitutes, in my opinion, an argument against the long continuance of Government action- in keeping money abnormally easy. In 1932 5 per cent. interest on a Government stock did not fairly represent the standing of Government credit. Moreover, holders of the Loan had enjoyed that high rate of interest for some years although the National Credit, had steadily risen. The point I would make, however, with regard to the great rise in Government stocks in 1932 arising out of the War Debt conversion is that the Government by its action was actually able to impose a new standard rate of interest, and it is that matter of imposing credit terms upon the investor, so far as Government and trustee stocks are concerned, that I think constitutes a weak point in the position.


Following upon the War Debt conversion the Treasury has continued to impose restrictions upon the manner and time of issuing new or conversion Loans of the trustee type to an extent which, while it has benefited the borrower, has begun to tax very sorely the investing public, which, it must be remembered, takes so large a part in meeting the demands of Government taxa- tion. For be it remembered that the position of the rentier is far worse today than some forty years ago when abnormally high levels were then established in Govern- ment securities. In those days Income Tax was about 9d. in the £, as compared with 4s. (id. today, while not only were local Government taxes also lower, but the cost of living was much smaller than it is today. I believe, there- fore, that it will not be long before it is discovered that the official efforts to maintain abnormally easy money rates are proving to be an almost unbearable strain upon the investor and taxpayer.


Indeed, there are already signs of less eagerness to respond to the new issues of Capital of the Trustee type, several of such new issues now standing at a discount in the market. Not only so, but if a comparison is made of the existing level of high-class securities, it will be found that for the first time for some years there is a decline as compared with a year ago. In December of 1934, the representative list compiled by the Bankers' Magazine showed a gain in Fixed Interest Stocks of 4303,000,00D at the end of 1933, the gain for the year was £223,000,000, and at the end of 1932—the year of the War Loan Con- version—there was a rise of no less than £520,000,000. The Bankers' Magazine Valuation for December is not yet published, but comparing the November figures with December of last year, there is a decline to note of over £140,000,000, so that in spite of continued cheapness of money, holders of British Government Stocks find their holdings slightly depreciated in market value when com- pared with a year ago. Moreover, I cannot regard it as a good—or, at all events, as a healthysign that.those who anticipate a fresh rise in gilt-edged securities pin their faith in part to expectations of a continuance of easy money and in part to a fact which in itself should occasion weakness rather than strength—namely, the expectation of further large issues of the Trustee class. In other words, it looks as if the idea was generally held that, in view of these issues, official aid would still be at hand to insure Money remaining abundant and cheap.


The fact is we now seem to be acting on entirely different lines from those, say, of the pre-War period. Starting with the idea that a certain standard of living must be maintained for the wage-earners of the country, irrespective of the ability of industry to bear the strain in the matter of wages, we do not allow those forces to operate which in old times have often cared trade depression by bringing down costs of production with a consequent lowering of prices to a point once more bringing about a genuine demand on the part of the con- sumer. And yet these new methods can scarcely be considered as having been wholly advantageous to the community, with trade still slack as a whole and with nearly 2,000,000 of the population unemployed. I know that some of the causes of those conditions may be traced to international, as well as to local factors, but one of the greatest aids to a revival of international trade will be international co-operation in the matter of the stabilisa- tion of currency, and when that time arrives money rates are likely to be higher than they are today. Altogether, therefore, I incline to the view that while no immediate decline in Government Stocks may be at hand, and while, indeed, they may even rise above their present level, the r"epaccahlecd". cannot be far off even if it has not already been ARTHUR W. KIDDY.