Economic Factors and the Bourse – Security Price Comparison -Dear Money and Lack of Capital

«The Economist», 6 febbraio 1926, p. 268

Turin, January 27

The topic perhaps most discussed in January was the apparent contradiction between financial and economic statistics and the Bourse situation. No one who studies the admirable monthly bulletin of the Italian Treasury can fail to be struck by such a contrast. The last financial year closed at June 30, 1925, with a surplus of 417 million lire. In the first six months, from July to December, 1925, of the present financial year, we have an effective surplus of 227.6 million lire. Public internal debts, which were 93.163 million lire at June 30, 1924, 91.988 at December 31, 1924, 90.847 at June 30, 1925, are at 91.536 at December 31, 1925. The figure is lower than a year ago, and the increase of 689 million lire in the last semester is largely offset by the 1,313.8 millions lire increase in the Treasury deposits at the Bank of Italy in the same period. Foreign exchanges, which appeared to go from bad to worse from January (24.06 lire to the dollar), to July (27.42) improved very much in the second half of 1925, and the quotations of about 24.80 for the dollar and 120 for the pound sterling seems to be stabilised.

A strong dollar reserve was built up in the United States by means of the 100 million dollars loan, and, so far from exhausting it in artificial endeavours to maintain the present rate of exchange, it appears from authoritative source, that the net balance of international payments has made it possible for Italy to reimburse the previous 50 millions Morgan credit and to increase the fund at the disposal of the Treasury to a figure estimated from 150 to 175 million dollars. The adverse commercial balance from a monthly average of 976 million lire, decreased to 273 millions in the five months from July to November. Crops were good, especially wheat, whose yield of 6,560,000 tons compares very favourably with the 4,630,000 of 1924, so that imports will not be so great as in past years.

Industry is developing at a rapid pace, as can be gauged from the increase of electrical energy sold from 4.357 million ettowatt-hours in the first nine months of 1924, to 4,789 millions in the corresponding period of 1925; and from the increase of coal imports from 6,816,109 tons in 1924, to 7,862,577 tons in 1925 (eleven months figures are given for both years). Unemployment is almost over: 112,059 were wholly unemployed at November 30,1925, against 135,785 at the same date of 1924, and 280,775 at January 31, 1924; half-timers sank to the negligible figure of 4,855 individuals. Industrial bulletins report impossibility of accepting orders which are coming, and, the first declarations hint to a general increase of dividends by the joint-stock companies.

Notwithstanding all such favourable factors, Bourses are in a desponding mood. Professor Bachi has calculated number indexes for joint-stock shares prices on the basis of 100 for December, 1918:

As in December, 1918, security prices generally were about 25 per cent, higher than at December 31, 1913; the general indexes should be increased by 25 per cent, in order to gauge the extent of the rise over the prewar prices. At December 31, 1921, in days of rampant Bolshevism, prices had therefore fallen even below pre-war level. The subsequent rise was in general moderate, and at present (end of January, 1926), with a general index lower than the December one, perhaps not much higher than the 116.6 figure of October last, we can say that the general average of paper prices of securities is only about 50 per cent, higher than the gold prices of 1913. Compared with a contemporaneous increase of paper price of gold in the ratio of 1 to 5, and of wholesale prices level from 1 to 6.5, the increase of the securities level from 1 to 1.5 seems strangely out of proportion. A study of the individual categories helps to explain the result. Iron and steel and engineering share prices are well below pre-war prices, being 26.3 and 26.5 per cent, of the December, 1918, level, which was, as above noted, only 25 per cent, above the pre-war level. These industries were the worst sufferers from the post-war crisis, and have as yet not recovered a market sufficient to employ in full their production capacity. The world crisis in shipping freights explains the low level of shipping shares. The bank share index is depressed by the inclusion of the depreciated Banca Italiana di Sconto securities. Chemical industries have also undergone a crisis of transformation from war to peace production. If we exclude these special categories, the general level of securities would fall, in comparison with pre-war days, from the high point of 8 or 7 to 1 for silk (natural and artificial), to a more general level of 3 to 1 for other industries. No wild increases have, therefore, taken place in Italy which could be compared with German or Austrian speculative movements in periods of mark or crown depreciation. Italian bourses do not suffer from an exaggerated level of prices in relation to the present values of assets or to reasonable hopes of profits. A lot of securities can be bought at present with a probable net income of from 5 (land and house property) to 7 and 8 per cent. In many cases, given a prospect of stabilisation of the lira at about the present level, there are probabilities of substantial appreciation, if only the real cause of the present weakness could be eliminated. Joint-stock companies are suffering from lack of working capital. Italian industry is severely hampered by dear money. New savings are, in the first place, absorbed by the sound Treasury policy of increasing taxes so as to wipe out deficits and convert them into a surplus; and, in the second place, by the tendency of agriculturists to invest their savings in improvements to land and buildings. The necessity for new houses in urban areas has also absorbed a huge amount of capital. These requirements do not leave sufficient capital for the needs of industry. Shares are difficult to place and recent issues, it is said, have partly been left on the hands of the issuing groups.

The settlement of the American and British debts will clear the way to a useful understanding between capital exporting nations and Italy, which, from an industrial point of view, is a new country. The motor-car industry is an instance of what can be created by a man of genius and industry like the president of the Fiat Company, Signor Agnelli. Perhaps a fifth of the 500,000 inhabitants of Turin live, directly or indirectly, on the motor-car industry, which twenty-five years ago was non-existent. There is a possibility that in a few years this number will be doubled, and also that large numbers of Turinese will live on the artificial silk industry, which is expanding at a rapid rate. Enormous also is the possibility of expansion of the electrical industry, whose net work is every day extended, and is more and more closely connected under a few central holding societies, of which Signori Motta and Ponti are the very able chiefs. The present Bourse crisis is therefore a crisis of growth. The problem is to maintain the equilibrium between new savings, and the energetic will and capacity to expand which our captains of industry display.