FINANCE-PUBLIC & PRIVATE.
[By OUR CITY EDITOR.]
WHY STOCKS ARE FIRM.
. [To the Editor of the SPECTATOR.] SIR,—To comprehend the firmness of the Stock Markets in view of such matters as the Ruhr crisis and the chaotic political and economic conditions in Europe it is necessary to appreciate two circumstances. One of them is what may be termed the technical position of markets and the other is the favourable factors which are offsetting the disturbing, or at all events the threatening, influences. Although the freedom of dealings on the Stock Exchange is gradually returning and speculative facilities are increasing, the general mass of the speculative public which before the War was accustomed to run huge accounts on the contango system is not at present very much in evidence. For the most part both specu- lative and investment operations have been on the part of the well-to-do, the ordinary middle-class being too fully preoccupied with such matters as the cost of living and the burden of taxation to have very much cash available for Stock Exchange purposes. Therefore, it will be seen that, in the absence of large accounts carried for a weak public, markets are less sensitive to adverse political rumours - than in the pre-War days. That there are large concealed speculative positions is probable enough, but they consist for the most part either of large holdings by wealthy individuals who are able to wait a considerable period for appreciation in capital value or of purchases by wealthy people on borrowed money. In both cases the position is helped by the fact that owing to the ease in money the rate of interest on the stocks acquired, even though of a gilt- edged character, usually affords a margin of profit over the loan rate quite apart from the chance of a big appreciation in capital value. Moreover, as I have frequently pointed out, the effect of the Ruhr crisis and all that it involves is, so far as StOck Exchange movements are concerned, somewhat offset by the fact that unsettled politics mean unsettled or stagnant trade, which in its turn means a continuance of that most important Stock Exchange factor—easy money. Moreover, I think there is little doubt that speculative holders of. British Funds are now setting great store by the improved position of the National finances and the prospect sooner or later of fresh schemes for the funding of the Debt. The latest weekly Return of Public Income and Expenditure shows that up to Saturday last there was a realized surplus for the current year of nearly £70,000,000, and although as explained in my last letter the Budget figures will be adversely affected by lower estimates of Revenue, the economies now taking place in Expenditure naturally encourage hopefulness with regard to further possibilities in that direction.
Nor must it be forgotten that in searching around for economies the Government is entitled to include the prospect of conversion of maturing loans into securities carrying a lower rate of interest, and in view of the fact that more than £100,000,000 of Debt will be maturing in the present year and nearly £1,000,000,000 within the next five years the market is reckoning on the likelihood of some conversion proposals at the first suitable moment.
Allowance must, of course, be made for the fact that the Government will be disposed to await thoroughly favourable conditions, so that the economy effected in debt service may be as great as possible. That, however, in its turn also has, a stimulating effect upon existing gilt-edged securities, because the more favourable the chances of Debt conversion from the Government's point of view the better is the prospect for existing holders of stocks. Nor must it be forgotten that while a good deal of the outstanding debt does not mature immediately, conversion well ahead of maturity dates is almost a necessity. When it becomes a question of converting obligations with only, say, another year to run, those obligations are usually held by the banks or the Money Market, to whom a long-dated loan does not make the same appeal as to the ordinary investor. I am inclined, therefore, to place market expectations of conversion proposals among the factors responsible for the present firmness.—I am, Sir, yours faithfully,
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