THE INVESTOR'S PROBLEM

New Zealand Herald, Volume LXIX, Issue 21298, 27 September 1932, Page 5

THE INVESTOR'S PROBLEM

RISING PHASE OF CYCLE CAREFUL ANALYSIS NECESSARY In the course of comment in their current bulletin upon the .appearance of greater confidence in the business world, Messrs. J. B. Were and Son, Melbourne, devote some attention to the problems confronting investors as a result of the new conditions which hav<j arisen.

"Assuming that the bottom of the depression is now past," states the review, "what policy should an investor adopt in the rising phase 'of the cycle ? This is so fundamental a problem that it will necessarily receive more detailed attention from time to time. In the first place three important factors dominate the situation to-day—the anti-deflationary policy associated with low interest rates and central bank the acute degree of unemployment, and the time which will necessarily ilapse before full production is resumed, and the formidable nature of the present barriers to international trade. ''The reaction of these factors upon the profits of individual industries will determine the course of equity values in the immediate future. Each industry will need to be studied on its merits and the underlying factors which were emerging between 1925 and 1929, changes in public taste and in the elasticity of consumers demand, rationalisation of production, etc., must be analysed and assessed. While the full effect of the depression upon the relative position of different industries cannot yet be gauged, some general inferences can be made.

"Cheaper money rates must, if they persist, mean increased capital prices. Manv observers, including some wellknown economists, are of the opinion that low interest rates are likely to remain in force for a lengthy period in a manner similar to that in the decade leao to 1903, when the ruling rate on Consols was as low as £2 10s per cent. They support this view by pointing to the overcapacity of industry in general, the slow rate of growth of population, and the absence of any notable virgin field foi ca P'" tal development. Although these considerations may prove to be short-sighted m the long run, the indications point to low rates of interest for the immediate future. Under these circumstances the price level of equities must be adjusted upward. "Although an investor could have done well by an indiscriminate selection from the list of securities in the early stages of the revival, a much more critical appraisement will be necessary in future. For instance, what grounds are there foi a belief that the extravagant habits of 1929 and the heedless consumption of luxury goods will speedily return ? Will future profits justiiv the capitalisation placed upon ■ so many enterprises before the slump ? Furthermore, debts have still to be paid even though their real burden may be greatly reduced by a rise in prices, and a readjustment on capital values where capital is lost cannot be indefinitely postponed. Consumption is likely to be restricted to immediate needs for some time to come. "On the whole, those trades which deal in final consumers' goods are likely to increase their earnings before the instrumental or heavy constructional trades show a similar recovery. Raw material producers and the general consumption trades are likely to lead the way, followed at a later date by the heavier industries, and then by the luxury trades, financial and investment interests. To some extent the existing barriers to international trade are likely to prevent expansion in the interchange of the world's staples, and to depress the export trades of the principal industrial nations."