Investors9 Defences HOW ARE ASSETS SAVED FROM WAR?

Press, Volume C, Issue 29626, 23 September 1961, Page 10

Investors 9 Defences HOW ARE ASSETS SAVED FROM WAR?

(By

-LYNCEUS"

of tht “SeonomUt")

(From tht "EconomW lottlligenct Unit)

London, September 12. What does the prudent investor do if he thinks a war is about to begin? One’s first reaction perhaps the meat sensible one is to dismiss the question. But the fact is that investors have been reacting to the increase of international tension this summer, and if their reaction has been distinctly confused, this is all the more reason for .asking what the rational reaction should be. First, the background history. In the old days a war or threat of war was the occasion for marking stocks and shares down all round. And not without reason: while in retrospect it may appear that British shares at their low points in spring, 1940, were absurdly cheap, at the time they looked risky at any price. Since the Second World War. however, a new and supposedly more sophisticated doctrine has gained support. This is that always provided one is not going to lose the war, a war or a war scare is likely in time to lead to a rise in equity share prices effects. Thus the investor who held shares in 1939 has seen the market value of his portfolio keep pace with the fall in the value of money, while the man who “went liquid,” or still worse bought fixed - interest securities, sustained a substantial loss in real terms. The Korean war provided another example pointing to this conclusion. Those who followed the old doctrine and “went liquid” when the news came through soon regretted their decision, while those who bought shares in commodity-producing companies were doubling their

money. Confused Logic

Korea seemed to show clearly that a “limited war” lat least provided strong reasons for investment in ordinary shares provided the investor was also ready to sell the more risky shares once the war influences had died down. Yet in reacting to war scares since then investors have always had to face the tricky questions in the underlying assumption: suppose we lose, and sunno-e me war turns out not to b« limited after all? This summer’s Berlin crisis has provided a striking example of such confusion. A.t first Wall Street was sluggish. Investors, the analysts explained, were anxious about Berlin, and while the uncertainty prevailed they would not add to their commitments. Soon, however, the market was bounding up again; and the Berlin crisis was again invoked. By early September the Wall Street indices were almost a fifth above their end-1960 levels, and most leading shares were at new peaks. A similar ambivalence has been noticeable about the investors’ attitude to Germany. True, German share prices have been falling on balance since September, 1960 they had risen dangerously fast before then and the fall quickened in early summer. On the other hand, foreign money continued to pour into Germany until July; it was held in government bonds or in bank deposits on which no interest was paid. Operators still had all their eyes on the possibilities of currency changes, beside which

the threat to Berlin seemed a minor influence. Indeed, the Berlin tension was cited as an unfavourable factor for sterling, and when Britain's Chancellor of the Exchequer (Mr Lloyd) raised the bank rate to 7 per cent at the end of July he gave as one reason the unsettled political situation abroad. Reappraisal Now at last investors and merchants who hold foreign funds appear to have decided that Berlin is in Germany after all, and they have been pulling money out. It is not clear, however, in what measure this is a reaction to their fears of a political crisis rather than to their reappraisal of the currency situation after Britain's series of measures and its big I.M.F. credit.

There appears to have been no huge movement of private funds into Switzerland, which is the normal haven for political ‘‘funk” money. The main recipient of the withdrawn German funds has been the United States, though sterling has also felt the backwash. Hrs such a movement any rationale on a war scare view? Is there any reason to believe that a piece of paper entitling one to paper dollars in New York or pounds in London would be any more use in a holocaust than a piece of paper entitling one to funds in a centre nearer the Iroq Curtain? Is there, in the nuclear age, anything in it?

Most investors seem to have decided that there probably is not. The movement out of Germany was largely attributable to other factors. This does not mean that hedging against the possibility of war has been entirely absent. In the West as a whole, there have been few reports of hoarding of foodstuffs such as have been common on previous occasions though, significantly enough, such hoarding has been observed in Communist countries such as Poland. Precautionary purchases in the West have been more limited, and distinctly specialised. There has been a marked (increase this summer in | private buying of gold. This buying, in contrast to the (rush into gold that occurred a little less than a year ago, has not been set off by speculation against the dollar as such. The pace has been set by small and medium operators in Europe, notably Germany, and the Middle East, and the aim is plainly to secure a physical asset that stands some chance of keeping its value in a holocaust. The buying so far has been steady rather than massive, and its effects on-the market (have been reduced by the (action of the Bank of England, working in conjunction with the United States authorities. in supplying gold to check the rise in price. Since nothing fans demand for gold more than a rise in its price for this commodity the normal laws of supply and demand go out of the window this has succeeded in keeping speculative buying within bounds. There is nothing inevitable about a run out of currencies into gold, even if the warscare psychology takes firmer root. For who can be sure, if the worst befalls, that gold rather than aything else will remain an asset of value?