FINANCE AND INVESTMENT
By CUSTOS FACED with a substantial enlargement of the rearmament programme investors may be forgiven for pausing before entering into any fresh commitments. From Mr. Attlee's statement it is obvious that some substantial measures to reduce civilian demand are in prospect and that the whole of Britain's economy must undergo serious readjust- ments in the coming months. Just how the adjustments will be effected and the forms they will take can only be surmised, but nobody can doubt that the Budget will bring new tax burdens. Nor must one ignore the probability of a gradual switch-over of labour and materials from the non-essential to the more essential trades. Against these depressing influences—in the market sense—one can set the strong under-current of inflation which will help to keep equity shares, and especially the rearmament groups, on an upward course. This is still a time for investment but on cautious lines.
Bankers on the Pound The season of the bank chairmen's annual statements has come and gone, and investors have been left in no doubt as to the main essentials in the economic prospect. Last week 1 drew attention to some of the bankers' views on inflation. Another topic on which there is practical unanimity among the bank chairmen is the future of the pound. Lord Linlithgow. chairman of the Midland Bank, expresses the view, widely accepted in the City, that this is no time for revaluing sterling in terms of the dollar, since such a step might easily result in dissipating some of the gains already achieved. He makes the practical suggestion that " it may be worth considering whether further progress could be made by offering inducements with suitable Safeguards." In arriving at much the same conclusion Lord Aldenham, chairman of the Westminster Bank, emphasises the need for a further building-up of Britain's gold and dollar reserves. " We need a much more substantial dollar reserve before any revaluation of the pound should be considered. The real test of our ability to earn our living in a competitive world has been postponed, not averted, by the present emergency, which has once again created sellers' markets. But we must bear in mind that any increase in our cost level due to ow present concentration on defence preparations will make that real test harder for us when it does come." Like the Midland Bank chairman, Lord Balfour of Burleigh, the chairman of Lloyds Bank, favours progress towards a freer sterling exchange, as opposed to any policy of making the pound dearer in terms of dollars. Indeed, he makes the point that so long as sterling is hedged around by so many restrictions it would be paradoxical to raise its external value and so subject it to increased pressure in the foreign exchange market.
Gold Share- Outlook
The inference to be drawn from these appraisals of the exchange situation by the bankers is clearly that any early revaluation of sterling can be ruled out as impracticable. That is a " bull point," though of a rather negative kind, for holders of gold-mining shares, since any rise in sterling in terms of dollars would mean a fall in the sterling price of gold. What the gold-share market needs, however, much more than a negative reassurance of this kind, is an increase in the dollar price of gold, such as would offset the rising tendency of production costs. There are indications in the growing volume of gold sales at premium prices in the free markets that one day the American authorities may see fit to raise the dollar price in New York, but that time still seems to be a fair way off.
Baldwins (Holdings) Future
The steps taken by the Ministry of Supply this week to announce the vesting details relating to a long list of iron and steel securities removes any lingering hopes there may have been that steel nationalisation might be postponed. It is now clear that on February 15th the transfer to public ownership will duly take place and holders of iron and steel securities will become possessed of a British Iron and Steel stock whose terms have-still to be fixed in the light of market conditions. Vesting day will bring problems to the directors of several companies which, while not on the take-over list, are substantially interested in other concerns which are. Among them is Baldwins'(Holdings). which has a large portfolio of invest- ments, with no less than 73 per cent. in iron and steel securities, scheduled for take-over on vesting day. On February 15th Baldwins (Holdings) will receive for these investments Iron and Steel stock, approximate value of £7,045,000. In addition, it will hold about
£2 million of other investments, of which £880,000 is in gilt-edged and the balance in equity shares. I estimate that allowing for the repayment of the various classes of Preference capital the break-up value on Baldwins (Holdings) 4s. Ordinary units should work out at about I Is. 3d. This compares with today's price in the market of 10s. It seems clear, therefore, that if the directors see fit to propose a liquidation, as in my view they should, a buyer at today's price stands to make a modest capital profit. The income position has up to the present been satisfactory, in that for the year to September 30, 1950, the Ordinary dividend was 17 per cent. For the current financial year the interim has just been increased from 5 per cent. to 6 per cent. To maintain revenue at anything like this level the company would have to dispose of its Iron and Steel stock, on which the return will not be more than 31 per cent., and reinvest in other directions. So far as the Ordinary stockholders are con- cerned, there is an analogy with the Cable and Wireless situation, in that the maintenance of the dividend position would seem to call for some form of capital reorganisation. The simplest course would surely be to wind up and leave the reinvestment problem to the stockholders. Meantime, the 4s. units look good value for money around 10s.
£s Million Loan for Norway
The opening of subscription lists next Friday to a £5 million loan for the Norwegian Government is something of a post-war landmark in the history of London as a financial centre. This will be the first foreign lending operation in the London market, with the exception of a small loan to Iceland, to any country outside the Common- wealth and sterling area since the war, and to judge from preliminary indications the loan is likely to meet with a good response. The terms-4 per cent. at a price of 96, with redemption dates of 1961-66—look well suited to current market conditions and Norway's status as a borrower. Assuming repayment at par in 1966, the latest redemption date, anyone who takes up the stock at the issue price of 96 will get a yield of just over £4 12s. per cent.' This seems to me a fair return in relation to the risk involved. While Norway is in the political danger area, investors here will not forget that during the last war she succeeded in bringing both her fleet and her gold reserves out of enemy hands and was able, in consequence, to maintain the interest service on her loans and to bring amortisa- tion up to date immediately after the war was over. In the case of the loan now being floated the proceeds are to be used exclusively in financing the cost of ships constructed in United Kingdom yards, and the service, including redemption, will be met from the earnings of Norway's mercantile marine. Norway ended the war with a merchant navy reduced to only 2,700,000 gross tons, against 5 million tons before the war. During the past five years she has been able to rebuild her fleet to nearly 6 million tons but in the process has virtually exhausted her sterling resources. The stock has attractions as part of a mixed portfolio.
Selection Trust Merits For investors who would like to have a stake in commodity shares but who prefer to take an indirect interest through one of the large holding companies the 10s. Ordinary shares of Selection Trust have solid merits at the current price of 47s. 9d. This company has a portfolio which includes substantial holdings in American Metal, Consolidated African Selection, the diamond concern, Rhodesian copper shares, various other base metal producing shares and gold shares. Although the current market value of the portfolio can only be estimated, a conservative calculation shows that without taking account of the holdings in Tsumeb, a promising South African base metal producer, there is an assets value of at least 49s. behind Selection Trust's 10s. shares. It follows that a buyer at today's level of 47s. 9d. acquires for less than nothing the substantial investment in Tsumeb and any appreciation in the Trust's portfolio above the book values. On the income side the dividend for the year ended March 31, 1950, was 20 per cent., but recently the Trust has announced an interim of 10 per cent.—the first interim so far declared—on account of the current year. This points to the probability of a total of 30 per cent., which should be covered by a large margin of earnings. If a 30 per cent. dividend is forthcoming the shares will be yielding just over 61 per cent. If the dividend proves to be only 25 per cent. the return will be over Si per cent. The shares should pay well to put away.
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