3 SEPTEMBER 1921, Page 10



(To THE EDITOR op THE " SPECTATOR."] SIR,—There have been few occasions when the investor has had greater justification for perplexity as to the course to pursue than at the present time. The recent decline in bankers' deposit rates from 5 to 3 per cent. has not unnaturally quickened the desire to find profitable outlets for surplus funds. It is not surprising, however, that many potential investors, having regard to past experi- ence on the Stock Exchange, are still inclined to leave a considerable portion of their savings on deposit, fearing lest the higher yield, which admittedly can be obtained in the investment markets, may be offset by some fresh set-back in capital value. Neither in this nor in any subsequent letter have I the least intention of suggesting individual &eke for the pur- pose either of investment or of speculation, because I am so old-fashioned as to believe that such advice comes within the functions of the banker and the stockbroker rather than the financial journalist. My present object is rather to indicate the pros and cons, not with regard to a par- ticular stock, but with regard to what may be termed the three leading groups of securities, namely, the gilt-edged or fixed interest yielding securities, such, for example, as British Funds and the prior charge stocks of English rails, or even bank deposit accounts themselves ; the speculative investment group, such, for example, as home railway ordinary stock and the stocks and shares of leading industrial companies ; and the purely speculative groups, such as mining and oil shares or the shares of industrial concerns which have fallen to a very low level and therefore seem to present exceptional chances of appreciation in capital value. Dealing with the first of these groups, namely, the gilt- edged section, I find it impossible wholly to ignore the purely statistical line of argument. Thus, in a recent article in the Bradford Chamber of Commerce Journal, Mr. A. H. Gibson, the well-known statistician of Harrogate, adduces many excellent arguments for British Funds and other high-class stocks having touched low-water mark last year. A study of cycle movements in fact leads him to the definite view that over a period of years the move- ment will be steadily in the upward direction. While careful to make reservations such as the impossibility of foreseeing any war or great revolutionary movements, Mr. Gibson explains why he considers a security such as Consols should rise to 60 within a period of two years, to 65 within a period of three years, and to 70 within a period of five years. It will be seen, therefore, that according to this authority the cautious investor need have no hesitation about the direction in which to embark his funds, for even allowing for the rise which has recently taken place, Consols are at present only 48, thus offering a very handsome margin of profit within the few years mentioned by Mr. Gibson.

I am far from decrying this statistical method of calcu- lating the chances of market movements, but all the same I mast confess my inability to feel very sure of an early sustained rise in gilt-edged stocks. If, on the one hand, money rates were to remain cheap as a conse- quence of continued trade depression, the effect on the country generally would be so disastrous as even to affect gilt-edged securities. If, on the other hand, trade were to improve I believe that the rise in money rates might be such as to check for some time any material improvement in high-class stocks, while similarly the world-wide demands for capital, already very great, would be still further stimulated, with the result that fresh public issues of capital of every kind would tend to prevent any material appreciation in fixed interest bearing securi- ties, even if they did not actually occasion a decline. Nor must the magnitude of the issues involved at the present time in such matters as the grave situation in Ireland, the unsettlement in Europe, and the extravagance in National and Local Government expenditure be ignored, because developments in those directions either for good or ill must necessarily be so important as to leave their mark even upon high-class investment stocks. For my own part, therefore, I can only say that while in the absence of any unforeseen catastrophe I am inclined to support the view that low-water mark in investment stocks may have been touched last year, I think that with the present rate of taxation and other influences operating any appreciation must be slow. As regards the second group of securities, namely, the speculative investment group, I think that there is perhaps a little more to be said of a favourable character. As I pointed out last week, there are a good many stocks in the English railway market and in other directions where the present yield is so high as to leave a considerable margin for accidents and to afford a good yield to the investor during the period that he may be awaiting a rise in capital value. Moreover, the high taxation with the high cost of living is in itself an influence constantly pushing the investor towards stocks giving a high yield, especially when in addition the chance of capital appreciation is thrown in, and while the intending investor will undoubtedly do well to seek information with regard to the particular stocks selected, a careful study of prices will show that the oppor- tunities for obtaining a high interest yield, with tolerably sound security, are fairly good just now. One warning, however, must be given so far as the industrial group is concerned. Already in the reduction in, and in some cases the actual passing or postponing of dividends on ordinary stocks by some of the industrial companies we get an indication of the damage wrought by the present trade depression, and I am afraid there is little doubt that during the next six months the industrial market will receive some nasty jars from the unexpected passing of dividends, if nothing worse. Our industries have been hit both by trade depression and by taxation, and now may possibly be hit by excessive foreign competition. Conse- quently, much caution will be needed in that department, for at present the worst effects of the trade depression, excessive taxation and over-capitalisation, have not been revealed.

As regards the third and final group, namely, the purely speculative descriptions such as mining and oil shares, I must speak with still greater caution, though I am none the less of the opinion that it is these markets which may witness considerable activity and probably considerable improvement in the near future. In the first place, they will be helped in an even greater degree than the specu- lative investment markets by the influence I have already referred to, namely, the excessive taxation, which drives the holder of surplus money to seek appreciation in capital value rather than an actual interest yield. The latter is penalized by the 6s. income tax, the former escapes altogether. Moreover, both in the Kaffir market and in the oil section yields ranging from 10 up to 18 per cent. at present prices are by no means infrequent, though the investor has always to remember that the speculative character of the securities is sufficiently indicated by the height of the yield. As regards the oil market in par- ticular there is a considerable section keen to acquire shares if they fall to a lower level, a circumstance which gives a good deal of stability to the market at present values. In fact, one point which might fairly be urged by optimists in favour of most sections of the stock markets at the present time is the manner in which values have been well held during the holiday period, with its greatly restricted volume of actual dealings. Moreover, as regards groups 2 and 3, that is to say, the speculative investment and the purely speculative sections, it should be noted that in the event of a trade revival and dearer money rates resulting, these departments would be less sensitive to the adverse influence of a rise in money rates than would the gilt-edged section itself. When the investor is attracted by some very high yield or by the chance of a great appreciation in prices, the question of a 5 or 6 per cent. Bank Rate scarcely counts as an influence. The position, of course, would be different if there were large speculative accounts running in the Stock Exchange on borrowed money, because then anticipations of dearer money would also prompt fears of an actual refusal to lend by the banks, thus forcing stocks upon the market. At the present time, however, the contango system is suspended, and I am basing my remarks on the idea that all stocks, whether required for investment or speculative purposes, are actually taken up and paid for. When, therefore, the pros and cons of these three groups of the stock market are considered, I cannot help thinking that there will be a good many who will elect to pursue a three- or even four-fold course, that is to say, the potential investor with a large amount on deposit, seeking employ- ment and having regard to the peculiar uncertainties of the moment and the obscurity of the outlook, may elect to place some part of his savings in purely gilt-edged securities, reckoning the present yield to be good and the chances of a further serious fall not very great, even should the rise be delayed. He may then with a part of the balance make selections from the second and third groups, not improbably, however, still leaving—if he is wise—a considerable balance on deposit available for purposes of averaging should untoward circumstances disappoint hopes of an early profit, and also for taking advantage of the many new investments to be offered from time to time.—I am, Sir, yours faithfully,