Out of fashion

It appears that many are losing their appetite for investing in the stock market.

This is occurring despite the widespread newspaper and other media coverage and public awareness of the stock markets.

We seem to be shifting away from common shares, although we have accumulated too much debt and issuing more equity capital would help to readjust balance sheets and reduce risks. That is unfortunate as, for instance, the banking sector needs equity capital for new industries to emerge and develop.

This is taking place as investors everywhere are moving away from equities into other assets. For example, a university endowment fund invested in Russian timberland; some have opted for participation in toll roads.

Demographic changes, regulatory pressures, and the fact that the stock market has not advanced in over a decade, have contributed to the new approach to investing. With more workers retiring and fewer working, bonds are emerging as more appropriate investments than equities.

Furthermore, as regulators are deterring others from investing in common shares, now notably insurance companies are in the forefront of those shedding equities.

If one were to look at the developing world, there is no reason for optimism about their investing in what historically was the venue for placing funds, the stock market. Like many of us, the developing world now shuns common shares.

Despite the lower level of demand for equities, companies still have to issue equities to improve their balance sheets and to fund expansion plans.

According to press reports, even now there is an excess of supply over demand for equities. Yet, developing countries will worsen the situation as they are likely to cap North American markets as that is the best place to raise capital.

Hence, if supply exceeds demand, share prices in all likelihood will fall. Then rising dividends yields again may tempt investors to buy common shares.

It also is possible that governments everywhere may encourage demand for equities by offering tax incentives and to tighten regulations to curb scandalous activities that frighten away investors. Lower corporate tax breaks are only a very remote possibility, given the financial binds that besets governments.

With bond yields so low companies will be inclined to take advantage of low interest rates to borrow funds in the bond market. Furthermore, the stock market is going out of fashion in view of its extreme volatility and the uncertain economic outlook.



Bruce Whitestone