. Are Securities Too High ?
Finance
THE title of this article stands for a question which is being asked on every hand, and I fancy tr.at it is one which is being constantly put to Financial Editors. With some of the leading Government seeurities giving a yield of under 3 per cent., it is not surprising that many inves- tors seeking for safety with at the same time a somewhat higher yield are wondering whether an investment at present prices is not to court the danger of depreciation in capital values within the next few years. And even the somewhat more speculative investor is also faced with the fact that when seeking fairly sound security it is difficult to obtain a stock excepting at a price giving a yield, say, of 3/ to 4 per cent.
A COMPLEX SITUATION.
Now, when this general question is put of whether 'prices are too high, the disposition, at all events, I Must confess my own disposition, is to reply in the affirmative, but when the questioner presses the matter further by asking whether an early decline is to be expected or whether prices have reached their peak, the question is one almost impossible to answer. For the situation contains this curious paradox, namely, that the very reason prompting the assertion that prices are probably too high is also the reason for a refusal to express an opinion that a reaction is imminent or that prices may not go somewhat higher before a reaction sets in. And the reason for expressing the opinion that prices are too high is, of course, to be found in a recognition of the fact that present conditions are wholly abnormal, and in some respects artificial. Yet that same reason makes it impos- sible to say whether these abnormal conditions may not continue for a considerable period, thus delaying any material reaction, if not causing an actual further advance.
GOVERNMENT CONTROLS..
Prominent among these abnormal conditions is, of course, the extreme eheapnesS. of Money -in this and in other parts of the world, and that Saine cheapneSs, as I have explained on previous Occasions, is due not entirely to natural influences,..- but .in part:- to. a . determination of Governments of ,the chief countries of the world to expand credit and keep supplies Of money very abundant. Thus, even when considering_the prospects of improved trade, with a consequent increase in the demand for loans, it. is impossible to -say how. far the Governments -which are intent on the continuation of cheap money may offset such natural influencers by continued credit expansion.
Moreover, among other abnorinal conditions responsible both for the ease in money and the rise in securities must be included the .tendency fOr .Capitalist countries to refrain from employing their reioinces overseas, thereby greatly narrowing the opportunities of the investor, while, similarly, the spirit of economic nationalism which finds expression in exchange and trade-controls also prevent; that expansion_ i international trade which should tend to bring about moieribrmal conditions. . •
INFLUENCES OF REARMAMENT.
Finally, so far as conditions at home are concerned, -much of the present activity_ in Industrial securities and the consequent rise in prieeS, both of commodities and of Industrial shares, is due to the expenditure already taking place on the rearmament programme, together with expectations that such expenditure will materially increase dining the next two or three years. Thus, we have special activity and strength displayed in the shares of all companies in any: way likely to be affected by rearmament,' prices of metals and of the 'shares of Iron and Steel companies ; Aviation and Shipping shares all tend to advance. There is little doubt that a similar movement would also be more marked in the ease of English Railway-prior-charge stocks if it were not for the fact that the Railway Industry happens to be -almost the largest employer of labour in the country, and, conse- quently, likely to be affected by demands for increased wages, especially if the cost of living should advance; Now, if we are to assume that these admittedly abnormal conditions .are to continue for an almost indefinite period, -then I think it would have to be said that the Prospects .of some further rise in prices is more 'probable than any early reaction, and, indeed, I think that perhaps Most people would be inclined to say that as there is a proSpect of the abnormal conditions continuing for a considerable while, the moment of- a permanent reaction may not be at hand, although, -when We remember that specula- tion, as distinct from investment activity, is beconiing increasingly apparent on the Stock Exchange, there may be occasional sharp reactions in some directions as the result of political scares Or Other adverse influences.
' Tim LONG VIEW. - When, however, the longer view is taken, it may well be asked whether it is reasonable to anticipate an indefinitely prolonged continuance of present abnormal conditions, both economic and political. They are conditions which certainly do not minister to international goodwill, still less to internatiOnar co-operation, and it is difficult to see how international political unrest can be unduly prolonged without something in the natiKe of an international catastrophe, While it also renaiins to be seen how far' Governments can niaintain a policy of monetary and credit manipulation without producing conditions of an unsound character. It is, I think, the very definite feeling Of this kind which prompts so many now to raise the question whether securities are too high. So long as the movement in stocks, including the speculative descriptions, continues to be almost uninterruptedly upwards, there is, of course, a, constant stream of buying, but it is a movement begotten rather by a desire to secure quick profits through a rise in market values than by a 'desire to anchor permanently -in this or that particular ..security. Already. the alireh leu7 decent yield On thepart of the genuine inycstor is bringing forth all kinds of advertisements of securities promising to yield rates of interest wholly incompatible with the securitywhich the investor is seeking; and, coinciding as this dearth of sound securities does with abriornialiy high taxation, there is a feverish, desire for dealings in securities for a profit, which,: however satisfactory it must be to the stockbrokers, promises to create con- ditions far from conducive to sound conditions either socially or financially.
A SIGN TO WATCH FOR.
It is impossible, moreover, to forget that the present policy of Governments in the creation of artificial con- ditions as regards monetary policy and other factors would be impossible if we were still under the controlling influence of gold standards, and I mention this point not so much by way of proclaiming that there should be im early return to such controls, but to register the view that as soon as there are any signs of a real movement in
(Continued on page 730,,)
Finance
(Continued from page 728) the direction of the stabilisation of the exchanges, based on a return to gold, investors may regard such a develop- ment as heralding a gradual return to more normal conditions and a reaction from abnormally high prices of securities. I must confess, however, that at present I see no such signs. ARTHUR IV. KIDDY.
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