7 JUNE 1940, Page 28



LIKE the B E F , financial markets have fought a rearguard action with tremendous doggedness and with astonishing suc- cess. True, there has been a sharp contrast between the gilt- edged and equity sections, but that does not alter the essential fact that investors as a whole have stood firm. Some selling there must always be: the advantage which gilt-edged have en- joyed is a modest stream of buying orders. In the speculative groups, and especially in home rails and industrial equities, small sales have found no cushion of buying, and jobbers, act- ing as men of business, have had no course open to them but to lower their prices. In conditions such as now surround Throgmorton Street I see little use in blaming the weakness in the industrial market on the timidity of jobbers or the rapacity of " bears." Jobbers must protect themselves, and as for the " bears," I doubt whether they have been responsible for any real weight of sell- ing. The trouble, as I have said, has not been the pressure to sell, but the complete inhibition of buying. If and when buyers reappear jobbers will be glad enough to put prices up quite sharply. Why is money avoiding the speculative groups and concentrating on gilt-edged?


Part of the answer is that the Government is constantly re- minding us that it needs all we can afford to lend in the financing of the war effort. In the case of the large institu- tions whose buying is an important factor, especially in these days of quiet markets, this official " reminder " now amounts to a request that funds should be held back for subscription to the coming war loans. Individual investors, although not subject to the same degree of control, also feel that it is more patriotic to take 3 per cent. on gilt-edged than to seek 6, 7 or possibly 10 per cent. on speculative securities. Then, of course, the Government has done its best—and a very formid- able best it is—to reinforce the appeal to patriotism by an appeal tc the investor's commercial sense. By its successful defence of the cheap money position in Lombard Street, the imposition of minimum prices and its determined fight against the forces of inflation, the Treasury has done a great deal to convince investors that it is not merely virtuous but good busi- ness to buy gilt-edged stocks.

Unfortunately, helping gilt-edged, while it has every justi- fication in war conditions, has involved the Government in delivering several heavy blows at the equity investor. Anti- inflation measures, the 10o pew cent. Excess Profits Tait and the like, all rob equities of their major attraction, which con- sists in the chance of higher net earnings and dividends, with their corollary of capital appreciation. Add to these officially- imposed curbs on the equity market the checks implied in reduced consumption, rising taxation, loss of foreign assets and now the risk of physical damage from air raids or invasion, and you have an ample explanation of the widespread falls in home industrials, home rails and most other groups of speculative shares. Already the divergent trends in gilt-edged and indus- trial equity prices have widened the difference in yields to about 3# per cent. That could not be justified on any reason- able view of the effects of taxation or reduced consumption. There remains, however, the wholly unassessable risk of damage from enemy action. Nobody can estimate how heavy the blows will be or where they will fall. I think it is worth remembering, all the same, that fundamentally gilt-edged prices must depend on the maintenance of our productive power.


In abandoning the dividend limitation plan—apart from the ban on capital bonuses—the Treasury has shown courage and good sense. As soon as the Chancellor announced the increase in Excess Profits Tax from 6o to too per cent. it became apparent that the retention of the ban on capital bonus dis- tributions was all that was really required in the way of legis- lation to achieve the main object of dividend limitation, namely, to prevent large extra sums being paid to investors and thus swelling private spending-power. Already the vast majority of companies have adopted a conservative dividend policy, and this will now be reinforced by the Chancellor's request for co-operation along these lines.

(Continued on page 794)


(Continued front page 792) To the prosperous companies which have made good profit and paid steady dividends over a long period of years th,, dropping of the dividend limitation plan makes very littl difference. The companies which gain are those just emerging from prolonged depression or the development stage and thos. which have latterly increased their dividends only to be face with the necessity of reducing them. Let us make no mistake all dividend decisions are going to be cautious ; but the abandonment of the limitation plan does remove an arbitrarily- fixed ceiling which threatened to impose hardship and injustice and to provoke a whole crop of appeals. Even as things are. the E.P.T. itself is bound to keep the Board of Referees busy handling cases calling for special treatment. Among the com- panies which stand to benefit by the abandonment of dividend limitation are British Electric Traction, Marks and Spencer, J. Samuel White, Lancashire Cotton, United Molasses, Trini- dad Petroleum Development and Bibiani Gold. In all these cases the market has recognised the position by a modest upward adjustment of share prices.


I suppose it was inevitable that the Government's emergency powers over the banks should have encouraged the cheap money group, which believes that a further cut in short money rates, under the lead of the Bank Rate, is desirable for the country's good. Questions are being asked about Bank Rate control, and, as one might have expected, the Chancellor has left no room for doubt that the last word on Bank Rate lies with the Government now even if it did not before. Whether the Treasury intends to force a reduction in rates in Lombard Street is another matter. I see no reason why it should. The saving to the Government as a borrower on Treasury Bills would not be large and the dislocation in the money market would be severe. In any event, such a move would require a wholesale readjustment of the whole structure of interest rates which has latterly acquired considerable stability on what seems to me a level appropriate to the times.


Shareholders in the Hudson's Bay Company can always rely on their governor, Mr. P. Ashley Cooper, for a full and frank survey of the position at the annual meeting. This year they had to forgo any definite forecast of the 194o results, but the general impression I get is that the prospects are reasonably good. Mr. Cooper described the outlook for the fur trade as uncertain, and he also warned shareholders that gross profits would have to bear a heavy and increasing charge for taxation. On the other hand, purchasing power in Canada, on which the company's sales in many important branches of the business are mainly dependent, is bound to expand as Canada's war effort gets into its full stride. Hudson's Bay LI ordinaries are now quoted at 19s. 3d. after having touched 27s. 3d. earlier this year. They are well worth holding for eventual recovery.


Among the smaller insurance companies, Licenses and General has succeeded in maintaining a remarkably steady business despite the handicaps of war. Not only is it paying the zo per cent. dividend which has been in force for the last o years, but in 1939 every department, with the exception of motor insurance, made a satisfactory contribution to the year's profit. At the annual meeting the Hon. Reginald Parker, the chairman, stated that in the life department the number of policies issued in the first eight months of 1939 was only 97 below that of the previous twelve months. These results amply justify the company's incursion into the life field four (Continued on page 795)


(Continued from page 794) Nears ago. As to the investment position, a transfer had been made from the general reserve, but a valuation at December 29th showed that the investment reserve, together with only part of the general reserve, was more than adequate to cover the depreciation below the book figure.