Investment Notes
By CUSTOS
r-r FIE bourses are slumping all over the Western I world. Since the beginning of the year Wall Street has fallen by over 20 per cent.; London, according to the Financial Times industrial index, by 16 per cent. As 1 write, the German bourse is down 22 per cent. on the year, the Dutch by 17 per cent., the Swiss by 20 per cent. and the French by nearly 17 per cent. Commodity prices are also falling and last week even the controlled price of nickel was cut. The investor may be wondering whether the 'cult of the equity' is over. It was silly to talk 01 a 'cult;' because while an equity share is the best of all long-term investments when a company's earnings and dividends can be relied upon to grow at a rate faster than the national average, it is the worst of all if they stop growing and start falling. The investor should always work to a strict rule—that equity shares should never be bought unless the earnings yield is well above the gross redemption yield on long- term gilt-edged stocks, which is 61 per cent. today. Recently many 'growth' shares were re- turning less than 6 per cent. on earnings and less than 21 per cent. on dividends. Nor were their companies' earnings likely to grow consistently for the period of years which it would take the earnings yield to be translated into a .divi- dend yield. All this pointed to an over-valued market in equity shares.
Wall Street
Although the earnings yield on our Financial Times index has risen from 8.5 per cent. to 10 per cent.--which is only half what it was in 1958 - --the net earnings yield after tax at 7s. 9d. is just over 6 per cent. This is the figure which should be compared with the 5.4 per cent. earn- ings yield on American equities which is shown net of corporation tax. This does not put Wall Street into a buying range, for the American economy, being largely on a replacement basis, lacks the new major source of demand which would cause company profits to rise. As one broker puts it, there is a general feeling of un- certainty about the economic future, about the country's compelithe position, about the future of the dollar and about the stock market general. Searching the lists provided by this broker I failed to find any American stock which seemed to be yet at an attractive buying level.
London Bargains?
The prospective capital gains tax is no doubt preventing professional speculators from bar- gain-hunting in the equity markets. If the or- dinary investor is looking for 'cheap stock' he should confine his attention to the safety groups which 1 have constantly recommended and still avoid the engineering and manufacturing shares whose profitability has been so disastrously shattered by government policy. In the insurance group there have been some remarkable falls. For example, LEGAL AND GENERAL, the best of all lite shares, has fallen from 48 to 38 and has re- covered to 42 as I write; GENERAL ACCIDENT, which I recently recommended, fell to 90s., but is back to 97s. 6d. to yield over If per cent., and st.IN ALLIANCE has fallen from 103s. to 83s. and recovered to 84s 6d. to yield 3} per cent. Property shares have also had a knock and I am attracted by CAPITAL AND COUN- TIES at 47s. 6d.. The investor might look out for the new property holding company to be formed by Hambros and M. Samuel called Bishopsgate Property and General Investment. This will have a well-spread portfolio of the best property com- panies.
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