The Hunt Tor- Investments
Finance
A FORTNIGHT• ago in these columns .1 promised to deal from time to time with investment opportunities for those who were seeking not simply- an appreciation in capital value; brit a reasonably secure income, and in another column I comment upon one or two undertakings where a somewhat higher rate of interest'-is offered than can be obtained at the moment from actual gilt-edged securities.
By way of further introduction to these occasional notes on investments, I think it might be well, however, to describe some of the eonditioris which are responsible for the :present difficulty in obtaining a reasonable income from invested savings because, among other things, it would, perhaps, thro* a little light upon the kind of securities which are frequently commended to the attention of investors. Time was when many of the securities to which attention is drawn today would never have been included in an investment list, but would have beett described as speculations or, at best, as speculative investments. Nor, indeed, should I be in- clined to quarrel with the latter term being applied today, but the fact remains—and the investor must have become aware of it—that many, if not most, of the hints to investors given in the various journals refer much oftener to securities of a semi-speculative character than to those where safety of principal and absolute security of income are the first considerations.
CAUSES OF PRESENT CONDITIONS.
Now the explanation of this condition of things is both interesting and important because not only does it account for the difficulty—I had almost said the impossibility—of combining a yield of, say, 41 to 5 per cent. with absolute security, but it also explains why a financial writer is no longer able to give, with assurance, the guidance to the investor which would have been possible some years ago. And, first, as to the cause of the widening of the class of stocks or shares now some- - times referred to as reasonably secure investments ; some twenty years ago borrowers of capital were passing through a hard time by reason of the high rates of interest which had to be offered for loanable capital, while, per contra, those possessing capital were in the happy position of being able to obtain extraordinarily high rates of interest on their investments. Following upon the conclusion of the Great War capital was in keen demand, while the amount of such capital on offer was very limited. Some sixteen years ago, for example, it was possible to obtain the Government's 5 per cent. War Loan at a price giving a yield of nearly 6 per cent., while today the same Loan, but in al per cent. form, commands a heavy premium. Prior charge stocks of the best English Railways usually gave a yield of over 5 per cent., while the Ordinary shares of quite sound Industrial companies were expected to give to the holder a yield of about 10 per cent. Such conditions were, of course, unlikely to last for ever, especially as, coupled with high rates for bankers' loans, industry and all new enterprises tended to be checked by the high charges for loanable capital.
EXPANDING CREDIT. . _ Then, as is _usually the case, the pendulum began to swing to the opposite extreme. In more than one : country the heavy obligations of the debtor class, including Governments themselves, were deemed to be a drag upon recovery, and when in 1931 our own Government was forced to abandon the gold standard, with its restric- tions and limitations, the policy was conceived of bringing about extreme monetary ease, a policy which was ' rendered possible by the power of the Government to expand credit, though that power could not have been so expressed without the abandonment of the obliiations attaching to a free gold market. CHEAP. 1VIONEY POLICY.
At the World Economic Conference in this country a few years ago this policy of cheap money as a means for raising prices of 'commodities was adopted 'by all the countries in the Empire, while later it was adopted in wholesale fashion by the United States of America. The result is seen today in a precise reversal of the conditions of the years immediately following upon the War. Supplies of capital are abundant, while the power of Governments to impose easy money rates has been such that bank depositors only receive f per cent. on their deposits, a circumstance which has so driven them into high-class securities that from 3 to 81 per cent. has become the best rate obtainable on trustee stocks. During the last two years there has been quite a sub- stantial revival in trade, but up to the present that revival has had little, if any, effect upon the course of money rates, with the result that so great has be-come-the demand for all high-class securities that the ordinary investor, who, in spite of easy money, is still confronted with high taxation and a rise in the cost of living as com- pared with the pre-War days, is obliged to leave the safe shores of trustee investments and to seek for income from securities some of which can only be describd as semi-speculative. Moreover, as if to add to the difficulties of the investor, heavy declines in income have been suffered by holders of stocks which have been converted into lower interest-bearing securities, to say nothing of the actual losses which have also been suffered by holders of foreign loans in default.
ARTIFICIAL INFLUENCES.
Under normal conditions, however, it might still be possible for the financial writer to discern an impending change in conditions which would warrant the recom- mendation to the investor to hold his hand and wait for natural causes bringing about a natural reaction in the position, with a rise in money rates and a fall in prices of gilt-edged securities. As a matter of fact, however, it is no longer possible to rely upon the _speedy operation of natural causes for the simple reason that these have been, and are still being, counteracted by political policies and political happenings. As regards the latter, we have at the present time the wholly abnormal position of inter- national political disturbances having brought about the temporary deposit here of many million pounds of foreign money. It is money which under changed political conditions might be removed at any time, but at the moment is adding its force to other influences driving up securities. Still more difficult is it for the observer to say to what extent and for how long natural forces, such as a trade revival, with increased demands for loans, may be offset by Governments expanding credit to meet such increased demands. Control of these matters has virtually been taken out of the hands both of central and local banks, so that though there may be as yet no State control of the actual operations and policies of the banks of the countries, the fact remains that as regards credit itself the whole _position is under State control here and in many other countries. I am not concerned at the moment with determining whether this is a change which will, in the long run, be beneficial or otherwise,, but it undoubtedly accoimts for the present abnormal conditions as regards the famine in investment stocks and also for the inability of the ordinary financial expert to determine if and when these influences are likely to weaken.
That they will ultimately weaken or change I have little doubt, if only for the reason that present conditions of artificial ease contain within themselves dangers, just as the opposite conditions some years ago were also antagonistic to financial recovery. At present, however, it is difficUlt to discover signs of change, and meanwhile investment resources have to find an outlet—hence the wider field of securities which has to be accepted in making a choice of investment and hence the impetus given to the raising of fresh capital.
ARTHUR W. KIDDY.
- .(Inve31nwnt IVett,s- an page 3824
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