Finance..

The Rise in Government Stocks

A FRIEND called upon me the other 'day to ask whether I would advise him to sell,high-class investment stocks . at their present high level with the object of exchanging either into first-class .Gold• shares or into-those Industrial shares most likely. to reap advantage from any. rise in commodity prices. The idea'AippermoSt in his mind - was, first, that Government and kindred stocks were too high and, secondly, that in the event of a devaluation later on of our own currency, he might be _faced with a rise in the price of living, a rise which he might protect himself against, to some extent; -by seeking not only stocks or shares giving a higher return of interest, but shares in companies -likely to benefit by inflation and a ' rise in prices of commodities. Would not, he urged, the conditions that he imagined in advance cause a general fall in gilt-edged securities and a rise in the shares of various- Industrial . companies ?

AN INTERESTING PROBLEM.

His question brought to mind a similar one addressed to- me about the time that we departed from gold in • 1931 when a holder of gilt-edged securities was inclined to think that the bottom would drop out of that market and wanted to sell immediately. Fortunately, he was restrained, and while it is true that in the meantime certain Industrial shares have risen, he has lost nothing by holding on to his trustee stocks which now stand, in many instances, at the highest points on record. More- over, I pointed out to my enquirer the other day that, assuming that prices of commodities rose considerably, it did not follow that profits of Industrial companies would necessarily rise in proportion. For if there should be such a rise in internal prices as to depress the purchasing value of the pound, we should probably see such an increase in wages and costs of production as might materially affect the profits of the shopkeeper and other industrial undertakings:: Nevertheless, I fully appreciated my friend's feelings with regard to - his holding of high-class .investment . stocks which had appreciated so greatly in capital value, but I could only say to him, as I have said to many others in this column • during the last year or two, that while there can be no question that a peak must be reached in Governthent. and kindred stocks, I could see no clear signs at present of that peak having already been reached and that I felt inclined to recommend waiting for somewhat higher figures before realizing, though whether the advice was good remains to be secs.

During the past week the upward movement in Government. and kindred stocks has been very marked and the following table of a few representative securities shows the rise 's Li sh has taken place from the lowest points of last year. If- I were to go back to 1931, the year when we departed from gold, the rise in many instances would even be greater. The highest of Consols, for example, in that year was 60i and they were as low as 491. Thus, when compared with today's price there is a rise within three years of 83 points:

Lowest Present Stocks. Last Year. Price.* - Rise.

Consols 21 p.c. .. • . .. 701 - 821- 121 Consols 4 p.c. .. .. .. 1054 ' 115 91

War Loan' 31- p.c. .. .. 971 -1041x.d. 71

Funding Loan 4 p.c. .. .. 108 • 116 8 Victory Bonds 4 p.c. .. .. 1071 114 61 Conversion Loan 31 p.c. .. 971 1051 84 Conversion Loan 41 p.c. .. 1071 1131

Conversion Loan 5 p.c. 1944-64 1141 1191

Conversion Loan 3 p.c. 1948-53. 961 1031

64

Conversion Loan 21 p.c. - • •

9211.: 994 7 ii

Local Loans 3 p.c. ..

82 -Af

05* 13 Transvaal 3 p.c. '23-53 . . 981- 1024 31 B. of England Stock .. 320 369 49 India 24 p.c. .. 551 71 151 India 3 p.c. .. 651 85 194 India 31 p.c. .. - . 771 97 191 Metrop. Con. 21 p.e. .. 90 971 71 London Cty. Cl. 21 p.c. 70 801 101 London Cty. Cl. 3 p.c... 82 95 13 Port of London 3 p.c. " A" . - _______—__ 511 93 111 PROVINCIAL CORPORATIONS Birm. 31 p.c. aft. 1946.. .. 97/ 1054 Bristol 3 p.c. 1920-60 .. 93 99

Liverpool 31 p.c. .. 971 1041 . 1

Manchester 3 p:c. 1941.: .. 821. 941 lit

Sheffield 34 p.c. 1968 971 1051 7k *October 30th, since when there has beepa further riw?.

CONDITIONS COMPARED WITH 1896. - From the foregoing it will be seen Lthat, for such phlegmatic securities as Government . stocks the rise has been a remarkable. one, 'though it_ might, • perhaps, be argued that, taking:all- the facts into •eonsideration, gilt-edged securities are not quite as- high-as in the previous -gilt-edged boom of 1894-1896. Consols io 18964ere still inthe form of 21 per cents., but the price rose practically to-114, giVing a' yield to the investor of only £2 8s. 2d. per cent. Today. the same security, at -the, price of 821, .giyes a yield. of About £3 .0s. 7d. per cent. On the other:hand, if .Income Tax is taken into consideration it must be remembered that in 1811; the Tax was only 8d; in-the -£ as compared with 4s. 601. today. If we deduct froth the yield of £2 8s. 2d. on Consols in 1896 (at the price of 114), Income Tax of ls. 10d. the net result- is £2 6s. 4d. And if -from the present yield of Consols; at the price of 821, of £3 Os. 7d. we deduct Income Tax Of lls. 8d. the result is 12 9s. 4d,, which is slightly above the yield obtained in 1896.

GOVERNMENT'S CHEAP BORROWING.

I have made' this comparison between the present period and some forty years ago because while too much reliance must not be placed upon the argument, I think it is rather suggestive of the upward movement in Government stocks going somewhat further. I give two reasons 'for this possibility. During the past week the scarcity of bills and the abundance of money have driven discount rates down to a phenomenally low level and the Government was able to sell its Treasury Bills last Friday at under 4per cent. per annum. This circumstance has undoubtedly given an additional stimulus to gilt-edged securities, for bankers have probably competed keenly for the Treasury Bills and purchased fresh lines of Government stocks. But not only is this cheapness of money, as reflected in the low rates for banking deposits, an influence still driving gilt-edged securities upwards, but it is also just here that com- parison with 1896 breaks doWn completely. In that year the supply of bills was no doubt contracted by temporarily depressed trade, but the depression passed• and the increase in the supply of bills quickly brought about higher rates in the Money Market. Today the position is different. The scarcity of. bills seems likely to be of a' much more prolonged character, while a further new factor in the case is that two at least of the leading countries, namely;' the: :United. States and Great Britain, with their huge internal find it to their interests to plan for low money rates, while the very fact that they are the chief borrowers strangely enough enables them almost to control the course of money-rates—not, perhaps, a wholly desirable condition of affairs, but one which undoubtedly exists. I am constrained, therefore, to think that for the . moment, at all events, indications favour a . further rise rather than a fall in gilt-edged securities. 7;

ARTHUR. W. KIDDY.