FINANCE AND INVESTMENT
By CUSTOS
WHETHER or not the Government is tackling—or planning to tackle— the dollar problem on the right lines, markets are steadily proceeding with their task of making the appropriate adjustments to what are judged to be financial probabilities. To talk of certainties in these days is scarcely possible when so much hinges on political influences not only at home but in the United States. There are, nevertheless, one or two matters on which the stock market now seems to have made up its mind. First, and, in the investment sense, most im- portant, it is now accepted that already over a wide field, which is steadily being increased, the conditions of a sellers' market have given place to those of a buyers' market. That means smaller profit margins and reduced earnings which will be most noticeable in the case of companies with high production costs. The marginal firms, whose relative inefficiency has been masked in recent years by the fancy profits made in easy conditions, will be badly hit. Already there has been striking evidence of this change, and in the market the new situation is mirrored in the high yields, ranging between 6 and 12 per cent., which can now be obtained on a wide variety of industrial ordinary shares. Such yields are calculated, of course, on the rates of dividends at present being paid and register the market's doubts as to whether the dividends can be long maintained.
INTEREST RATES HARDENING
The other matter on which City opinion is now settling down is that interest rates are hardening—and that this is a natural and healthy tendency in the current economic environment. With per- sonal savings at a low ebb, taxation high and the demand for capital, especially for essential industrial re-equipment and development, very large, it is clearly appropriate that the lender's reward should increase. Until recently it appeared that the political attractions of "cheap money" would outweigh the economic forces making for dearer money, but events are now moving slowly in the opposite direction. On the basis of current quotations in the gilt-edged market the long-term rate of interest is 31 per cent., and evea at this level sellers still have the whip-hand. So far there has been no positive action, such as a rise in bank rate, as advocated by Lord Brand, to indicate that the Government is prepared to use a stiffening of interest rates as a weapon in its disinflatIonary campaign. Higher interest rates, as reflected in the fall in gilt-edged prices, are being brought into being through the normal processes of the market without any official instigation, but, equally significantly, without any attempt by the Government to support gilt-edged prices. It will be surprising if this tendency towards dearer money does not continue, although I think it will be slow, and will not proceed to the point, e.g., 5 per cent., at which the Government's borrowing rate could be said to be really high.
LIQUID ASSETS AT A DISCOUNT
It is one of the redeeming features of the present state of the stock markets that bargains can be had which in more buoyant conditions would not be available. A case in point is an old favourite of these notes, the LI shares of Steana Romana (British). A few weeks ago this company announced its decision to repay 5s. 6d. a share out of its surplus liquid assets. In consequence, the shares, which I have often recommended at prices between as. 9d. and 5s. 6d., moved up to 6s. 3d. Now they are back to 6s. This means that, allowing for brokers' commission (lid, a share) and transfer stamp (another rid.), a buyer at 6s. is giving 6s. 3d. for the coming repayment of 5s. 6d.—which is expected in the autumn—plus the remaining assets. These assets comprise just over Is. 6d. a share in investments, chiefly gilt-edged, held in London and the claim against the Rumanian Government for the extensive oil properties in that country now nationalised under Rumanian law. Whether
anything will now be obtained in the Way of compensation is any: body's guess, but it is clear that, ignoring this asset completely, the liquid resources in London are being valued at only about half-price. The shares are a good purchase for capital appreciation.
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