FINANCE AND INVESTMENT
By CUSTOS
SURVEYING the investment scene last week on the eve of the polls I posed the question: If there is a stalemate suggesting the
likelihood of another showdown in, say, a year's time ? I suggested the answer that confidence would still be lacking and the emphasis would be on gold shares and overseas securities." Well, the risk of a political stalemate has materialised and markets have given ample proof that real investment confidence has not been restored, with the inevitable corollary that investment and speculative interest has switched into gold-mining shares and, to a lesser extent, into overseas securities which are beyond the reach of dividend restriction at home.
In saying this I do not wish to imply that the investment picture is not less sombre now than before the election result was known. Many of the worst fears of the equity investor, such as a- further increase in Profits Tax, a capital gains tax and statutory dividend limitation, must be regarded as .having receded at least into the middle distance. It also seems a reasonable inference from the election result that the Government will proceed very slowly, if at all, with its threatened plans to extend the field of nationalisation. That is all on the credit side from the investor's point of view.
The Investment Prospect
The point I wish to Make is that the mere receding of fear is not synonymous with the restoration of confidence. What the average investor would like to see would be a substantial cut in Government expenditure, paving the way towards a worth-while reduction in taxation. He would also like to see the proper emphasis placed on financial incentives and greater freedom in the field of dividend policy. So long as the political stalemate continues it seems practically certain that the Government's financial policy will be non-committal, and that the need for a bold constructive programme will be subjected to tactical manoeuvring. With these uncertainties overhanging the market nobody would expect the investor to take a bold, enterprising view. All the same, now that hope has at last lifted its head, the shares of companies whose dividends are covered by a very large margin of earnings must be conceded to have some attractions. As for iron and steel shares, the safest assumption now seems to be that the Govern- ment's nationalisation plan will be shelved. That implies that iron and steel shares should now be assessed as the equities of companies trading in competitive conditions, though subject, so long as the Act remains on the statute book, to statutory dividend limitation. In my view the reaction in shares such as William Beardmore, Dorman Long and Colvilles, has been somewhat overdone.
The movement of funds into gold-mining shares, especially dividend-paying Kaffirs, and other overseas securities, is not at all surprising. The outlook for Kaffirs, in the light of the coming half-yearly dividend payments, is promising, and it may well be that activity in this section will broaden out over the coming weeks. Among the promising shares are Randfontein, at 27s., and Rose Deep, at 45s. 3d.
A Cheap Rubber Share
Another section of the market which may well shake Itself free from the general uncertainties in the coming weeks is the market in rubber shares. The background here is decidedly favourable, with the commodity quoted at a price which enables all the efficient producing companies to make satisfactory profits. Among the shares which look undervalued are the El Ordinaries of Jong Landor Rubber Estates, now quoted around 12s. 6d. This Malayan company, which has first-class management and a strong balance- sheet, paid a dividend of 5 per cent, for the year which ended June 30th, 1949. It was able to do so out of profits made on an average selling price for rubber of only 10d. a lb. If one makes the fullest allowance for increased costs, the profit margin in the current financial year, ending June 30th, 1950, must be substantially enlarged, and it will be surprising if the dividend is not raised. Even on the 5 per cent. payment the shares offer the attractively high yield of 8 per cent. In 1947 they were quoted as high as 14s. 9d., and as a measure of the earnings and dividend possibilities it is worth recalling that for 1940 the company paid a dividend of 15 per cent. The balance-sheet shows cash and gilt-edged holdings of over £35,000 and a general reserve of £15,000,'against an issued capital of only 189,500
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