FINANCE AND INVESTMENT
By NICHOLAS DAVENPORT THE fabulous two months which ended on November. 13, 1929, will always live in my financial memory. It was the time of the great Wall Street crash when panic seized the American investor. Market values fell by billions of dollars each day. It was nothing for the heavy stocks to shed 25 to 50 points at a time. An inflated bank stock like First National actually dropped $500 a share in a session. I well remember the bank stocks because I was a small participant in a syndicate formed by a London merchant bank, to buy and hold a block of Chase National Bank common. We used to hang over the ticker tape with white, grim faces watching our investment slide down the paper streamers as if it were confetti thrown at a Marxist wedding. The selling grew like an avalanche until by November 13 the leading industrial shares had lost half their previous value. The total shrinkage in market values was of the order of $40 billions. The panic was only stopped by a cut in income tax, a lowering of bank rate and the pegging of 'pivotal' stocks in the market by large standing orders. Well, the New York stock exchange has now broken through the 'high' which preceded the 1929 crash without causing the slightest ripple of alarm. The advance today is not based on borrowed money, there is no inflation in the credit structure or, indeed, in the economy, and a repetition of the 1929 crash would be impossible. Yet it is a curious fact that equity stocks today are selling on Wall Street at very nearly the same price-earnings ratio as they were in September, 1929, which was 131.
To the uninitiated I must explain that equity earnings are expressed in Wall Street at so many dollars per share, so that the market price is assessed at so many times the earnings. The conventional price- earnings ratio is, I believe, 10, but fashions change in investment as in dress. If earnings are expected to rise, or if less risk is assumed to attach to their maintenance, then buyers will predominate in the market and the price-earnings ratio will rise. It rose to 16 In the 1928 boom and to 23 in the peculiar post-war boom in 1946. It may rise to 16 again in 1955 if American investors take the view that their recession is ended and that their economy will once again 'enter a phase of expansion' as the chairman of the Council of Economic Advisers recently prophesied. Indeed, if the pension funds and the insurance companies continue their strong buying of equities they may well alter the conventional idea of the price-earnings ratio from 10 to 121 or 15. The rate of interest also affects investment conventions, for the market price of an industrial equity is merely the discounted value of future dividends or earnings. • • When I said recently that Wall Street was more vulnerable than Throgmorton Street it was because the discounting of future dividends and earnings of American Cor- porations was more speculative at a time when the economy had not yet emerged from its recession. In this country we are enjoying a well-earned boom and it is not necessary for us to bet upon a recovery.
In a few more weeks or months it will be possible to say whether the greater-than- seasonal recovery now being seen in the United States has closed the mild and orthodox recession of 1953/54.
It is, of course, possible to find cases where our own price-earnings ratio is so much higher than that of a comparable stock on Wall Street that one would say it is more vulnerable. For example, if we express earnings net of tax as the Americans do, it will be found that Marks and Spencier is selling here at 48 times earnings whereas Sears Roebuck is selling at only 16 in New York. Or Dunlop, which is selling at 19 times earnings here against 8.2 times for US Rubber. On the other hand, American chemical stocks sell at higher earnings ratios than does Imperial Chemical London. By and large I do not sup that there is much .to choose between two markets on this technical earnings although Wall Street, on the short might be more vulnerable.
Not long ago I commented on a broh circular which had been advising clients switch immediately fiaom British to Ameri equities because of the coming electi I did not agree with his estimate of chances of a Labour victory. If the Pr Minister decides to go to the country bef the Budget it may well be the signal for rise in the London market, on the grou • that a Conservative victory is more certo But I doubt whether a general cleca becomes a serious market influence het.. it is actually announced from Down Street,
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