Investing abroad
Nicholas Davenport
The freeze has become known in the City as the " Phoney Peace." It is a pause which has allowed the old long-term bull market to reassert itself but in view of the awkward things which are likely to arise when the freeze ends the investor would be wise to take stock of his portfolio and eliminate the holdings which appear vulnerable to such untoward events.
It will have been observed that a number of investment trusts have lately been formed to acquire holdings in Europe which should appeal to those excited by our entry into the EEC or nervous about the future of British industrial relations. The managers of these trusts will, of course, borrow abroad so as to avoid paying the so-called ' dollar ' premium which has risen to 344 per cent based on a $2.60 fixed rate for the dollar. The target date for the dismantling of the 'dollar ' premium for Europe has apparently been postponed to 1978. It is an added irritation that although the ' dollar ' premium now applies to stocks in our former sterling area the buyer of European securities has to surrender 25 per cent of the premium to the Treasury when he sells which he does not have to do when he sells an Australian or South African share. Some optimists believe that the Chancellor will relent in his April budget and drop the 25 per cent surrender rule for the European ' dollar' premium, leaving only shares quoted in Japan and Northern America subject to this outrageous premium grab. I will believe this when I see it. After the row over the treatment of immigrants from the old, white Commonwealth I cannot see the Government rushing to make investment in Europe more attractive than investment in the old Commonwealth or North America. Why should they try to penalise good investment judgement? There are long-standing disadvantages about investing in European equities. In the first place, the markets are very narrow, for they lack the jobbing system we have in London. It may take a week to invest a large sum in a leading Continental industrial share which could be done in London in a British industrial in a matter of minutes. In terms of capitalisation the London market is as large as all the exchanges of the EEC ' Six' put together. In terms of turnover London is at least four times as large. Large Continental companies appear to work from a much smaller equity base than their British counterparts and a high percentage of their equity capital is held in firm institutional hands. In Germany the commercial banks, to whom the companies look for their finance rather than to the market, may hold a substantial part of the equity.
In the second place, the accounting system on the Continent makes it almost. impossible for a British investor to know accurately what he is buying in the equity. The consolidation of accounts which is required in the UK is not the law abroad. Dutch practice comes nearest to our system but in Germany the law requires consolidation only of domestic subsidiary companies. If a German company has large interests abroad it will not necessarily be disclosed except in the chairman's speech. In France consolidation is not legally required unless the company wants to raise equity capital. Many of the leading French companies simply provide parent company accounts. One broker's excellent report I have read states that the accounts of major international companies in France are meaningless from the analyst's point of view. And all Continental companies have the irritating habit of hiding their real profits by making provision for bad debts which d,o not materalise, by making allocations to special reserves against unlikely contingencies and by depreciating at abnormally high rates.
This last point may suggest that leading Continental equities may be much cheaper than they appear to be. True, but they can also include items in their accounts which inflate earnings as well as depress them. It therefore requires an expert to get at the truth and the average British investor would be wise to leave it to the Rothschilds and the other merchant banks to do his selecting for him. They may certainly find some winners. If the OECD forecasts are to be believed France may be heading for a growth rate of 8.3 per cent and Germany of 6.6 per cent between 1973 and 1980. But when the OECD give the highest growth rate to Italy, which is so politically unstable that it may yet be turned out of the EEC for non-complian6e with its rules, I take these growth forecasts with a great pinch of investment salt. Frankly, if I have to pay a ' dollar ' premium of 344 per cent for investment abroad and surrender 25 per cent of it on
selling I would sooner do it for investment in Wall Street. The American economY seems set fair under Nixon's management. The ending of the Vietnam war will have no economic significance but it will help the budget deficit — his main worry. To quote the figures of the Economist, industrial production in the US in October was 9.3 per cent above a year earlier while consumer prices were only 3.4 per cent higher. The European countries cannot match America in the containment of inflation and the maintenance of steady growth. American unemployment maY seem high at 5.5 per cent but total employment has risen more rapidly since the recession of 1970-71 than in anY previous recovery. In the first nine months of 1972 the American GNP rose in real terms by 6 Per cent as compared with the first nine months of 1971, prices rose by 5.5 per cent and wages by 7.2 per cent. According to the Brookings Institution prices and wages are now rising at about 2 percentage points less than they were before the price and wage controls (now fifteen months old) were instituted. It seems to be generally agreed that legally enforced wage and price controls will remain 10 force throughout 1973. Even the unions agree in principle though they want to change some of the mechanics of control. And why not? At the moment American wages are going up at the rate of about 6 per cent while prices are moving up at the rate of 3 per cent and that because of temporary shortages in some foodstuffs. Only in lumber is there some trouble because of the housing boom. RecentlY many wholesale prices have actually gone down. I am not suggesting that some 0,f the big unions will not challenge the Pre5'. dent next year if he fixes the maximuro wage increases at 54 per cent — except for some of the lower paid — but I do suggest that the nine nations of the EEC cannot compare with America in the efficacy of their counter-inflation controls. Is Wall Street too high with the DoW index at 1024? The significant fact wans that when it went through the magic 100' • level there was no climacteric liquidation. Indeed there was a big increase in the volume of turnover on the rise with over twenty million shares being traded' The industrial shares are now selling at an average price earnings ratio of around 16, which is about the middle of the range lo the last decade, and have yet to discount the 10 per cent to 13 per cent increase 10 company profits which is forecast. Our investment trusts with large American portfolios are the safest hedge for the cautious British investor but any ne.W specialist trust formed to invest now '11 American stocks, especially in thoe ' second-liners,' should be a titbit he shotn° not fail to gobble up.
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