The Stock Exchange Situation – The Trend of Quotations

«The Economist», 3 dicembre 1927, p. 986

Turin, November 15

For about four months there has been an upward tendency in the stock markets. The weekly index of the Milan Chamber of Commerce (whose basis is December, 1925, = 100) rose in February to 81.92; but as the rise was artificial and the fear of the revaluation crisis remained, quotations collapsed again, and fell continuously to the minimum of 57.63 at June 25. After this date the rise has been continuous: 64.06 at July 29 ^th, 67.06 ad August 26^th, 71.92 at September 23^rd, 76.92 at October 29^th, 77.57 at November 5 ^th. Whether the present level of dividend-bearing securities is in equikbrium with the purchasing power of the lira is a much-debated problem. According to the Bachi index number, whose basis is December, 1913, the present level in paper lire is only about 20 per cent, higher than the December, 1913, level, which was practically in gold lire. As the paper lira had, according to the Milan Chamber of Commerce, at November 1, 1927, an internal purchasing power of 20.60 per cent, of the average purchasing power for 1913, the prices of securities, if they could have kept at the same level as the price of commodities in general, should have risen between December, 1913, and November, 1927, from 100 to 485, instead of from 100 to 120. There are several reasons for the much lower level of security prices. In the first place, securities in 1927 are very different from those of 1913. Almost all companies have increased their capital, and new issues were obviously made in depreciating paper lire. Complicated calculations would have to be made to reduce all issues, old and new, to a common denominator according to the value of the lira at the time of issue. And the problem would be hopelessly insoluble were we to take account also of new and old, open or hidden reserves, issues of free shares, and so on. It can be said in general that the present level of securities must be less than 485 according to the relative weight of new issues made in depredated paper. But there must be other concurrent causes of the big difference between 485 (commodity level) and 120 (securities level). If new issues were the only cause of the low level of securities, the shares of the companies who have not increased their capital should have been exempt from the depressing influence above described, and their quotations should be between four and five times the pre-war quotations. Within limits the facts do tally with these abstract deductions.

Depreciation of the lira would not of itself have been sufficient to push up quotations even in industries not specially hit by the peace. Depreciation of money can only increase capital prices of securities if the net yield of invested capital is increasing. Sometimes, as in real estate and electricity companies, the yield cannot rise in proportion to the monetary depreciation owing to legal restrictions. In other cases one or two big failures, such as that of the Banca Italiana di Sconto, bring down the whole group. Those groups have fared better which are new, such as artificial silk, or which were more pushful in conquering markets (motor-car) or in utilising old cheap plants (cotton).