Business opinion in Italy

«The Economist», 25 novembre 1939, pp. 286-287

Perhaps one of the best indices of business opinion about the trend of future political and military developments in our country is the current prices of variable dividend securities on the Stock Exchanges.

Most useful from this point of view is the index of 30 active securities quoted on the Milan Stock Exchange, which is daily published by the Corriere della Sera. These 30 securities can be deemed representative, as they include about a fifth of the capital of all joint-stock companies and more than a half of the capital of companies whose shares are quoted on the Italian Stock Exchanges. We can begin our analysis by taking into account the indices of prolongation prices (prezzi di compenso) which are fixed monthly by the Stock Exchange authority and which are the basis for carrying over bargains (riporti) from end to end of successive months. (See table at p. 772).

The upward trend is indeed not recent. The best part of the total upswing dates from the year from July, 1938, to July, 1939. But the upward trend was not then uniform. Textiles were a notable exception. Industry was badly hit by decreased consumption and the difficulties of purchasing raw materials, mixing inferior substitutes with genuine cotton, wool, hemp and jute, and devoting good raw material such as hemp to the manufacture

of inferior goods to which jute, for instance, was better adapted. The mining, iron and steel industry was also, for analogous reasons, passing through a transition phase: scrap iron and steel was difficult to obtain, and the grandiose autarkical programme of obtaining steel directly from iron ore, instead of mainly from scrap, as customary in our country, is not yet complete. It will succeed in putting on the market iron and steel at lower cost than at present, and probably at prices not higher – at a certain level of the dollar and pound sterling exchanges – than the world level. But the programme is to be completed only in 1942. The electrical industry, always sensitive, has made great progress in selling surplus power, but prices were not always remunerative.

The picture changes after the end of July: instead of erratic increases along with decreases (from -16 to +30 per cent.), the upward trend becomes general and more uniform. The spread of percentage increases is between a minimum of 7 and a maximum of 19 per cent. Business interests tend to believe in increased activity with higher profits. Most of the increase has taken place since August. Apart from the construction put on the official declaration of non-intervention made by the Cabinet on August 31^st and on the successive speeches by Signor Mussolini, it seems evident that general optimism on the future of industrial and financial business could not be justified if the Stock Exchanges had believed in war. Electrical plant and real estate are liable to bombardment from air and sea; food concerns would very likely be confronted by decreased consumption and price regulation. It therefore seems certain that business and financial circles believe in the continuation, more or less for a long time, of the present non-intervention policy.

An examination of the daily fluctuation of variable divindend security prices bears out this conclusion:

The uncertainty prevalent in the last week of August, as well as the usual end-of-month sales on settlement days, explains the weakness on August 25^th. As soon, however, as non-intervention was declared on the afternoon of August 31^st, quotations rose. The rise was continuous and general until the 22^nd. After a lull on settlement day (August 27^th), the lost ground was soon recovered. The announcement of new taxes on Saturday evening, September 30^th, left the markets unmoved. On Monday, October 2^nd, markets were again buoyant and optimism has since persisted.

Nor were the new taxes so light a burden as would easily be passed over. The new capital tax is an addition to the successive extraordinary capital taxes, which, in past years, have taken a large slice, including from 5 to 10 per cent, of the capital value of land, houses, and the net assets of joint-stock companies, private companies and individual concerns.

The new tax will be a permanent annual tax, and will amount to a 0.50 per cent, of the net estate of all individual taxpayers, joint-stock and private companies and other economic bodies. Exemption is granted only to State-issued securities, furniture and household goods. The burden of the tax will be 5 per cent, on income yielded by assets capitalised on a 10 per cent, basis; 10 per cent, on income if the capitalisation basis is 5 per cent.; and 16.66 per cent, on income if the capitalisation basis is 3 per cent. Adding these percentages to existing State and local income taxes, the total taxation on income is certainly not lower than the present British income tax rate of 7s. 6d. in the pound.

The second tax is not wholly new, for it takes the place of the old sales tax (tassa scambio). This sales tax was a levy on all sales between producers, between producers and middlemen, and between middlemen, at rates from 0.50 to 12 per cent. Many exemptions were granted. The new tax will be called a tax on receipts (tassa sull’entrata), viz. not on net income, but on all monetary items of gross receipts. The rate will be a flat 2 per cent. and will hit all receipts. Those who already pay the sales tax will now pay the new tax instead, and to their ranks will be added all agriculturists, who will pay on the cash receipts of their sales of wheat, oil, wine, cattle, fruits, vegetables; all house owners, who will pay on rents received; and professional men, who will pay on their fees. Sales from producers and middlemen to the final consumers, hitherto exempted, will now be taxed. A few exemptions are maintained: these include interest and dividends paid by the State and other bodies, bread, daily newspapers (books and other periodical publications will be taxed), salaries and wages, and receipts from the sale of exported goods. The tax will be paid, as with the old sales tax, every time goods change hands or services are rendered.

Although the burden of new taxes cannot be contemplated without some misgiving by interested taxpayers, the Stock Exchanges seemed indifferent. Even Real Estate securities, for which both taxes are a new burden, continued their progress.

Is this optimism justified? May not the Treasury be alarmed by a trend, which can be construed as a drift from fixed interest securities in favour of tangible non-monetary investments, and come to the rescue with Stock Exchange restrictions? Time alone can answer these questions, put with daily anxiety by investors to their brokers. My intention was simply to guess, through the trend of Stock Exchange quotation, what is the most probable general opinion of business circles on the future of Italian policy.

November 11^th.