Shares—Possible Hedge Against Inflation

Press, Volume CVII, Issue 31543, 4 December 1967, Page 17

Shares—Possible Hedge Against Inflation

Since devaluation, the New Zealand share market has not been the same: the currency change has resulted in an active market and introduced a series of investment possibilities which has led to comments that perhaps the bottom of the market has been reached. x

• The premises put forward for this are one, that the value of assets, excluding cash, must rise in terms of the depreciated dollar, and two, that our balance of payments position will now improve.

The second premise perhaps owes its foundation as much in hope as in economic theory and it is the first premise that might be the main one for a possible upturn in the market.

If freight charges and import costs rise, as seems likely, then buildings, equipment and raw materials will be dearer. This is one step towards inflation. Existing buildings, equipment and other material are dearer when considering the higher overseas costs that follow with devaluation. This is part of the theory that real assets must rise in terms of the depreciated currency. Higher Backing Because shares represent an equity in companies, most of which own real assets, it can be argued that the shares are worth more in net asset backing. A holding in equity stocks is seen as a hedge against inflation, and this is the basis for a possible buying mood in the market However, the normal type of inflation is usually synonymous with rising costs

matched by rising prices and higher incomes. The type of inflation facing New Zealand now might - have the first characteristic, but the second two will not automatically follow. It could be that businesses faced with higher costs for anything with a high import content, will not be allowed to pass this higher cost on by way of dearer products. Imbalance Down Even if it were possible, the deflationary pressure on the economy over the last two years has somewhat reduced the imbalance between supply and demand and buyers may not be willing to pay the higher prices. This of course would help the local manufacturer who could produce a substitute at a higher

price than before devaluation. It is possible that there could be the same fallacy behind the reasoning in buying shares as a hedge against j inflation as that attached to j the importance of asset backt ing of shares. i For some years the market / value of a share was often related to its assets backing, s rather than its earning r capacity. The inadequacy of t the take-over offer by U.E.B. I Industries for Ross and Glen- < dining was one of the points put forward in recommending that the bid be rejected. This and other bids, however, and the example of M.K. • Manufacturers, Clarke Petrous > and Marine Packers, which > have sold or intend selling I their assets because their ■ earnings in relation to their > assets are inadequate, have ’ largely exploded this investf ment postulate. I However, the holding of - real assets in a time of rising ■ prices seems a better propo-

sition than most other alternatives. Trading Normal Trading on New Zealand stock exchanges last week was almost normal after the strong buying pressures of the week before. The market was easier, but the index was only fractionally down for the week. Again, companies with overseas interests or export potential had a busy week, insurance groups continued to advance, with South British adding 7c to 345 c and N.Z. Insurance gaining 4c to 269 c. South British announced last Friday that because of devaluations in this and other countries, ' its assets gained $7.2m, or 2X.4 per cent. The other two insurance companies, N.Z. Insurance and National Insurance, are also likely to have fared well in capital appreciation because of the currency changes. In 1966-67, N.Z. Insurance earned 25 per cent of its premiums in Australia, 4 per cent in the Americas, and 20 per cent in the United Kingdom and Europe. Only 33 per cent was earned in New Zealand. Income Sources Insurance companies depend on two main sources of income, the profits received from underwriting and income from investments. In a bad year, when the companies receive substantial claims against them, the investment return acts as a buffer, thus helping to iron out profit fluctuations. In its latest trading period which covered 11 months National Insurance received sB.sm in premium incomes and made an underwriting profit of $357,777 —4.2 per cent of the premium. South British earned $36.9m in its latest year, yielding a profit of $1,467,767, or 4.1 per cent. N.Z. Insurance’s yield was 3.8 per cent from premiums earned of $24.9m and an underwriting profit of $956,258.

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