27 NOVEMBER 1936, Page 36

Politics and Markets


Wets svritiag last week upon the Outlook for the New Year 1 'emphasised the fact that with one exception the prospects were favourable for public securities. That elmeption referred to the extent to which markets might be disturbed by political alarms, to speak of nothing worse than alarms arising out of the disturbed conditions in Europe. Towards the end of last week, and after my article was written, markets displayed more anxiety than hitherto 'concerning the situation in the Medi- terranean, and on Monday, when those anxieties were quickened by reports of a submarine incident at Barce- lona, there was a more general and in places a more severe reaction in prices of securities than has been in evidence, probably since anxiety was acute concerning the Abys- sinian crisis. Already, however, markets have experi- enced some recovery, the fall in prices having brought in fresh buyers, but all the same Monday's scare, with its effect upon prices, may be said to have afforded a rather useful test of the general position -of markets, and, inasmuch :as the general public is 'manifestly attracted to the Stock Markets at the present time; it may be well perhaps to examine the situation and see whether there are any special dangers to be apprehended by those who may be thinking of acquiring securities either for per- manent or temporary holding.


When the markets were disturbed last Monday by the political considerations already referred to the decline in prices,' though general, was not severe apart from a fen, special instances. Rio Tinto Copper shares, for example, slumped heavily, being affected by the situation in Spain and by the fact that the shares have, latterly, been bought heavily by speculators. Another market that proved sensitive was that for Oil shares, where again the fall was due to weak speculative positions, while the same us true as regards the shares of Diamond companies in which speculative buying has been very heavy of late. Finalk, the market for gold shares also became flat, but here "the explanation was largely to he found in the fact that the Paris Bourse was directly affected by the political rumours and sold on the market here. A few Home Industrial shares, especially some of the shares in the Iron, Coal and Steel group fell hack materially, and in that direction also it was a case of speculative buying having been somewhat overdone.



All this, however, though not devoid of interest by way of commentary upon the past week's movements on the Stock Exchange, is perhaps scarcely helpful to the indi- vidual Who is considering whether he should realise any profits or whether he should feel that with reasonable discrimination the markets can be regarded as attractive for fresh buying.

In that .respect the situatian is a peculiar one, be,camse while most people would be inclined to assert that on intrinsic merits, whether of gilt-edged securities or of industrial shares, present prices are sufficiently high, the same people if challenged would probably have to express the belief that in very many directions a further rise is more probable than a fall. Y Nor is the reason for this somewhat paradoxical situation hard to find. There are certain powerful forces operating of a character impelling the individual towards the Stock Markets. I will mention a few of them. There is the abnormal cheapness of money and the likelihood of its continuance, -a condition brought home every day to the public by the meagre rate obtain- able on banking-deposits. In the second place, and always barring political disasters, there is :almost the certainty of home trade activity continuing for a year or two longer if only by reason of Government expenditure on rearma- ment defence. In the third place, high taxation, low yields on high-class investment stooks, and the rise in the (Continued an-page 968.)


(Continued from page 966.)

cost of -living are forces impelling the investor to add to his income_ either by acquiring other than gilt-edged securities or by seeking capital. appreciatiOn, which of course is not liable to taxation.


These are forces which have been in operation for a long time and may be said to be cumulative in their effect. Moreover, it also happens that the public is apparently possessed of an unusual volume of resources available for investment or for semi-speculative trans- actions on the Stock • Markets. In ordinary circum- stances, it would have been almost impossible to have had so prolonged -a rise in Stock Exchange securities without very weak speculative positions having arisen. That is to say, a vast number of those who purchased securities would have done so by borrowing from the brokers to carry over their securities instead of taking them up and paying for them. As it is, probably the greater part of the purchases have been effected out of the public's' own resources, or, if at times on money borrowed from the banks, the investor has been in the position of being able to deposit good collateral security and the stocks or shares themselves have been actually taken up and paid for. Hence it happens that in the case of a passing political scare such as that of last • Monday, the major effect is only felt in those directions where in contrast to the general position I have referred to, there has been actual speculative buying of a weak character. These. then, are some of the forces which have not only operated on markets for some time past but seem likely to operate for some time to come. In short, apart from politics, the arguments in favour of a further rise in securities are greater, perhaps, than those in favour of a fall.


At the same time, there are at least two points which the genuine investor or the purchaser of stocks for further capital appreciation should bear in mind. The first is that in the matter of political alarihs we- have at present had no more than passing scares. Were those alarms to extend not over twenty-four hours but over even a week or two, the effect on markets would undoubtedly be to occasion a very general and considerable fall, and as for the possibility of such an event the investor can only be advised to keep a constant eye upon the least sensational and the most responsible section of the daily Press.

The second point, however, which may, perhaps, be emphasised is that to every Stock Exchange movement which has yet been known there is a moment when the highest or the lowest point is reached. I know there are some who consider that we have not yet seen the lowest point in money rates'and that we are approaching a time when the investor can only expect the most meagre return upon his capital. Even, however, allowing for the revolutionary times in which we live, I cannot quite bring myself to hold that view, and that being so I believe that within a period of time money rates will be higher than at present and securities as a whole will be lower, especially perhaps as regards gilt-edged descrip- tions. A point, however, which is impossible to deter- mine is the period of time and all that can be said at the moment is that, always barring politics, there are no clear indications at present of any change either in monetary or market tendencies.