FINANCE AND INVESTMENT By CUSTOS INVESTORS are still bewildered by
the finan- cial implications of Mr. Butler. After the sharp break this week long-dated gilt edged stocks are practically on a 41- per cent, yield basis and industrial ordinary share prices are on an average about 15 per cent. below the pre-election level. Is this mild disin- flation_ or deflation ? Mr. Butler would doubtless argue that the market conse- quences of his larger financial policies need give no cause for alarm—at least not for the present. In one sense that is right— lower security prices are only the obverse of a rise in interest rates. One is entitled to remind him, all the same, that in the present state of uncertainty it is difficult, if not impossible, for the all-important market in new capital issues to function effectively. That cannot be part of the Chancellor's plan, although it may be part of the price which he is willing to pay to achieve his larger objectives. Is the fall being over- done ? After this week's falls, I am inclined to think that for the long-term investor the present basis is not unattractive. I must still enter the caveat that a really sustained recovery, either in gilt edged or equity share prices, should not be expected just yet. The market Must remain sensitive and subject to rapid fluctuations, for some time ahead.
A Relapse in Gold Shares Whatever may be the likelihood of Mr.
Butler's planned disinflation developing into something more akin to deflation of the old- fashioned type, there is little evidence that investors rate this possibility very high in the current performance of gold shares. As I indicated three weeks ago, gold shares should be the one group to show some recovery if, in fact, there is a reasonable prospect of a worth-while reduction in costs..
So far from having improved, this section of the market has been weaker than most others. This has been due partly to the fact that gold shares are, for the most part, held rather speculatively, partly to the virtual cessation of buying from Paris owing to the rather more stable international currency situation and partly to fears of drastic cuts in the half-yearly dividends now being announced. There can be little doubt, in the light of the encroachment of increased working costs on profit margins, that there will be many reductions in dividends for the current half-year. There is also the risk that the premium in the free gold market may diminish when the larger supplies from Australia, Rhodesia and other countries begin to add substantially to the selling side. All the same, gold shares still look to me to have promising long-term prospects whichever way the financial situation works out. If we get something approaching de- flation, bringing reduced working costs, the position of the gold mining industry will be correspondingly improved. If, on the other hand, American business begins to turn down, then, as a long-term possibility, we have to consider a higher dollar price for gold. Gold shares Must always be regarded as speculations, but, as such, shares of some of the Far West Rand propositions, such as Stilfontein now around 23s. 3d„ against a recent price of 27s. 6d., and West Driefon- tein at just over £6, look worth putting away.
Hudson's Bay Position One of the mysterious movements on the Stock Exchange in recent months has been the steady rise in the £1 shares of the Hud- 'sort's Bay Company. From a level of around 16 three months ago the price has gradually climbed up to today's level of £8, at which the shares offer only a negligible yield on the current rate of distribution.
Dealers have reported persistent buying of the shares from Canada to the accompani- ment of a number of reports, among which the most plausible has been that the buyers are intent on acquiring a controlling interest in the company with a view to changing the seat of control and management from Lon- don to Canada. There have also been mouth-watering accounts of the possibilities 'of the company's interests in Canadian oil. When this week it was reported from Toronto that a Canadian group of financiers were buying, with a view to control, Sir Patrick Ashley. Cooper, Governor of the company, took the opportunity to come out into the open and put matters in their true perspective. While he confirms that there has been some movement of the company's shares from the United Kingdom to Canada, he points out that the number of shares in Canadian hands is still less than 12 per cent. of the total capital. He rightly welcomes these new Canadian shareholders, but emphasises that no change is contemplated in the company's organisation. "Its head- quarters continue in London ; its policies remain unaltered ; its assets stay intaet." That, at least for the present, seems to scotch any ideas of the control passing from this country to Canada. In .his statement Sir Patrick Ashley Cooper also makes reference in cautious terms to the company's possibilities in the oil field. Once again he emphasises, as he did in the annual report, that the discovery and devEropment of oil resources is a long, costly and .speculative business, holding out no' hopes of large immediate returns. He does not deny, how- ever, that there are prospects of "eventual benefits to shareholders." What are holders of Hudson's Bay shares to make of all this ? It seems to me that with the quotation around £8 there can be little harm in selling to the enthusiasts on the other side of the Atlantic, who are obviously taking an over- optimistic view-of early prospects. I am not suggesting that there may not be a fresh wave of speculative buying, which will hoist the shares still higher. Against that, inves- tors must set the risk that if Canadian buy- ing dries up the shares would drift to a much -lower level.
Agar, Cross Problems If any reminder is needed of the diffi- culties now facing British companies operat- ing in the Argentine it is provided in the most striking terms in the latest annual statement of Mr. Val C. _Fisher, the chair- man of Apr, Cross and Company, the export merchants. He tells stockholders that expenses are constantly on the increase, that Argentine taxes are also rising and that a new tax in substitution of inheritance tax is to be levied on all limited liability corn- panies. It will amount to 1 per cent. on- the effective capital of Agar, Cross in Argen- tina. Mr. Fisher also calls attention to the acute difficulty -of financing the company's Argentine business and discloses that at present there is inevitably heavy recourse to the company's Argentine bankers. This is all depressing news, on top of the fact that in the last two years Agar, Cross has had to absorb exchange losses totalling no less than £1,387,346 on the net balance of its Argentine 'current assets. Fortunately, his survey is not all gloomy. The company is actively pursuing its plans for entering new markets, and already schemes have been agreed on which, in due course, are expected to make a useful contribution to profits. Meantime, the Ordinary stockholders, who have recently received 10 per cent, for the year which ended on June 30th, 1950, as a result of the receipt of remittance, have so far received no payment for the year which ended on June 30th, 1951. It is scarcely surprising, therefore, that the a Ordinary units, which earlier this year stood just over par, have fallen to 13s. While a purchase even at this level could not be regarded as other than a speculation, I would not advise holders to sell.
A Hotel Stock trk To the accompaniment oft various rumours, none of which has yet been con- firmed, there has been a good deal of specu- lative activity during the past two or three weeks in the Preference and Ordinary shares of Gordon Hotels. The favourite sugges, lion in the market has been that negotia- tions are well advanced for the sale by the company of the May Fair Hotel at a price well in excess of £1,000,000. While I have no grounds for believing that this report is correct, the very possibility of a deal seems to me to give Gordon Hotels' 7 per cent. Income stock speculative attractions at the present level of £103. Since the company disposed of the Hotel Victoria to the Government towards the end of 1950 for £705,000 its Debenture indebtedness has been substantially reduced. Apart from the £324,050 of May Fair Debentures there is now outstanding only £100,819 of 6 per cent. Debenture stock and £356,363 of the 7 per cent. Income stock. It is clear, therefore, that if a property deal on the lines suggested is carried through there should be no diffi- culty in repaying all these stocks out of the proceeds. The interesting point about the 7 per cent. Income stock is that interest is in arrears from January 1st, 1947. That means that on January 1st, 1952, there will be five years' interest, equivalent to about f18 net per £100 of stock, which, of course, will have to be cleared up in any repayment plan. I recall that in his last annual state- ment made in August the chairman indi- cated that the board were making efforts to dispose of assets and that if a reasonable price could be obtained, an offer would be accepted. I, therefore, regard this Income stock as not involving any great risk at the present price and offering a reasonable chance of a useful capital profit.
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