FINANCE AND INVESTMENT
By NICHOLAS DAVENPORT PROFESSIONAL investors always pretend to be ashamed if, with the funds they manage, they do not do better than The Financial Times indices. But I doubt whether many of them could have beaten this year the index of British industrial ordinary shares, which has risen by 38 per cent. To have secured an appreciation greater than that it would have been necessary to plunge on, say, Marks and Spencer or Great Universal Stores, which have more than doubled in price, and that would have meant departing from the professional technique of spreading the investment risks. The bull market is not yet over—it has lately been busy, as I predicted, responding to Mr. Butler's roseate views of the economy—but from now on I would expect the curve of the advance to flatten out. It is noticeable that the market is not so easy to move upwards on good news. Every fresh advance is obviously meeting with more profit-taking. The company news is likely to remain good —the interim dividends, as I expected, often turn out to be better than market estimates— but profit-taking is tending to increase. This Is due to various causes. First of all, there are very large profits to be taken—and the end of the year approaches. Secondly, the longer the security boom goes on—and it is now over two years old—the more nervous people get about its bursting. This, of course, is foolish, for there is no reason on economic grounds why our prosperity should not–be held, but investors have been so conditioned by the biennial economic crises of the Labour regime that they cannot believe that our economy can keep its balance for very long. Finally, average dividend returns are 1 per cent. less than they were a year ago and many blue chips' are yielding less than War Loan. This tends to deter buying and encourage selling, for the public hates to take long views. * A low dividend yield is not, of course, a good reason in itself for selling a sound equity in a 'growth' industry. It is the earnings yield which should decide long- term equity investment. I really believe that our stupid old-fashioned habit of expressing earnings as percentage of the market price of a share of varying denomination-5s. or 10s. or £1—makes the average investor too bored to bother much about such a complication. In America, which is sensible enough to have the no par value share, earnings are expressed in the financial press at so many dollars per share and every 'investor understands that he is buying a share at so many times its actual or esti- mated annual earnings, that is to say, at so many years' purchase of its potential income. That is never clearly expressed in our financial papers and circulars. If the Investor chooses to make the complicated calculation he will find that many 'blue chips' today, in spite of low dividend yields, are returning potential earnings yields (excluding EPL) of from 15 per cent. to 20 per cent. In other words, he can still buy sound equity shares at from five to sevenyears' purchase of their potential earnings. Equities in the Security shop are not as cheap as they were: in fact, some with very low earnings yields look dear: but by and large they are not expensive. American industrial equities are selling at a much more expensive level. In the past twelve months the Dow Jones index of common stocks has risen by nearly 40 per cent. although company profits are down and dividends are only being maintained (and sometimes increased) by the elimina- tion of excess profits taxation. According to a calculation made by the Federal Reserve Board common stocks were selling a year ago at an average of not much over nine times earnings. Today they are selling at nearly thirteen times earnings. By com- parison British equities are cheap. The price-earnings ratio is, of course, largely determined by prevailing investment fashion. In boom times American equities have sold at much more than thirteen times earnings- at.twenty-three times earnings, I believe, in the first post-war bull market—but in view of the doubtful immediate outlook for Ameri- can company profits I am not surprised to see one financial expert dekribing Wall Street on its present price-earnings ratio as highly vulnerable. British equities, in spite of their 38 per cent, rise, are not nearlY so vulnerable because their earnings for th• accounting period to the end of this yeal are likely to be a record in most industries, excepting cotton and wool textiles and shipbuilding. • It would be interesting to know boy/ many of the institutional buyers who have been forcing up the prices of British equities are willing to sell when a dividend yield falls below 31 per cent. The Church of England Commissioners, for example. When they have bought their £40 millions worth of equities (out of their Stock Exchange total of £137 millions) do they hold them for eves on the principle that they must have ae inflation hedge now that a semi-inflationarY policy of full employment has been Per; manently adopted by both political parties' Keynes used to make the joke that an activ• insurance company should only have onto investment and change it every day. BO institutional investors generally hate an active investment policy.
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