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06 July, 2013
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From James McKeigue, across the river from the City
Dear Buzzhairs Buzzhairs,
The week ended with a bit of a bang for the pound. First, on Thursday, Mark Carney came into the Bank of England and immediately walloped sterling by telling markets that they were completely wrong to expect higher interest rates any time in the medium term.
Then on Friday, US jobs data was better than expected. The fact that 195,000 people got jobs in June rather than the 165,000 the markets had been betting on, sent the dollar rocketing. Why? Because in the market's mind, more jobs means less money-printing.
All in all, sterling ended the week way below where it started it.
But Carney won't be worried. Inflation is all part of the plan. It's the only politically acceptable way to get rid of Britain's massive debt burden. Trouble is, it's not without its risks.
The yield on UK government debt (gilts) has also been rising this week. That suggests that bond investors are worrying more about inflation, and also that the prospect of more QE by the Bank of England isn't enough to keep them invested in gilts. If inflation fears were to take off, sterling could fall a lot lower and gilt yields could rise a lot higher, if Carney's not careful.
My colleague John Stepek had more in Friday's Money Morning.
How to invest as Portugal struggles
The eurozone crisis also returned with a vengeance. In Thursday’s Money Morning, John explained why. “Portugal and Greece have unnerved investors once more”, says John. “Portugal’s government is on the verge of collapse, and the Greeks seem incapable of the reforms they promised in return for a Eurozone bailout.”
In Portugal the problems are down to growing opposition to austerity. “Portugal has been a ‘good’ eurozone member. It has pushed through some tough measures. The trouble is, it hasn’t returned to the Promised Land. The recession has been more drawn-out than expected, and unemployment is already set to rise above 18%.” Unsurprisingly that has angered voters, leading to the current crisis.
There’s always been a ‘big lie’ at the heart of the eurozone project, notes John. “If you’re going to strap an economy like Portugal’s to one like Germany’s, then Germany has to be prepared to nurture and fund Portugal’s through hard times. And – in turn – the Portuguese have to be prepared to take a bit of guidance from the Germans.” The trouble is, no one told its citizens this when they signed up for the euro.
But while this type of crisis grabs headlines, UK investors shouldn’t worry too much. “Even if the current government fell, it would be replaced by another – to all intents and purposes for outsiders – just the same as the last.” The real problem for Europe is America’s threat to slow its quantitative easing programme. “It has effectively pushed up the cost of borrowing for every government in the world… That’s bad news if you’re the central bank in charge of a group of heavily indebted countries, and you can’t actively intervene to buy that government debt and keep a lid on their borrowing costs.”
Longer-term if the Federal Reserve does stop printing money then you’ll have fewer investors with cash burning a hole in their pockets. And that means fewer takers for “crazy punts on near-bankrupt southern European nations”.
These pressures will eventually lead to European money printing, says John. In fact, the European Central Bank came a step closer to this on Thursday, copying Carney's 'forward guidance' trick. To find the best way to play it, make sure you read his piece in full.
Of course not every strategy needs rising markets to work. My colleague Stephen Bland doesn't pay any attention to which way the market goes. In fact, he believes that if anything, volatile times like this offer a great opportunity to build your wealth. Intrigued? Take a look at this report.
Loyalty doesn’t pay
One of our most popular writers is Bengt Saelensminde, with his free weekly The Right Side email regularly the most-read piece on the site.
“Loyalty is out of fashion”, opened Bengt this week. “In the past you trusted the people you did business with, whether as a customer or an employee. In return for that loyalty and trust, you expected to be treated right.” Not anymore.
“Take the omnipresent loyalty card. It’s not there to reward loyalty. It’s a tool to gather data on you and your family and coerce you into certain ways of spending.” And of course loyalty to a company is no guarantee of a rewarding career either.
But realising that loyalty doesn’t pay can save readers tens of thousands of pounds, says Bengt. And if you think this issue doesn’t affect you, remember, “if you can’t see the sucker, it’s you”.
“Research by MoneySupermarket.com suggests that the over 55s are penalised most for their loyalty”, says Bengt. It “found that on average, people could save £300 if they didn’t just accept their current car insurance quote. That’s from just one bill.” And if that doesn’t sound like, much remember that this goes for many of the other services you buy. So what to do?
Well a simple place to start is with some filing, says Bengt. “Get all your papers together [and] make a note of the key contract expiry dates for things like insurance, TV services, private healthcare and all your other utilities. Put the dates in your diary with a reminder about a week before, and when your reminder pings up, shop around for the best online quote.”
Even if, for whatever reason, you really want to stay with your existing provider, you still may gain something from phoning up and threatening to cancel. OK, so this advice is hardly rocket science, admits Bengt, but it could save you a lot of money in the long run.
The response from the readers showed that Bengt’s advice had struck a chord. ‘Heather Hills’ agreed. “It is a sad fact that loyalty has all but disappeared from the business world – or indeed life in general. Trust has disappeared along with it too and trust was the original basis of sound banking practice.”
However, ‘4caster’ cautioned that switching insurance policies could be dangerous. “One can chop and change frequently for some financial products, but I don’t change my buildings policy very often. The reason is that if ever a serious structural claim were to arise, such as heave or subsidence, the new insurers could wriggle out of paying, on the grounds that the subsidence probably existed before the policy started.”
Bengt’s got plenty more advice on there and you can read the piece here if you haven’t already.
Britain - the most heavily indebted country on earth
You may never have heard that before, because the TRUE state of debt in this country is very rarely talked about.
But make no mistake - when you look at the numbers, Britain is in a massive amount of trouble.
And that could signal no end of pain for you in the coming years.
Click here now to protect yourself.
The Fleet Street Letter is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Past performance and forecasts are not a reliable indicator of future results. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600.
Commoditis head south
One of the worst investments of the year must be the mining sector, says Tom Bulford in this week’s Penny Sleuth . “After a new low last week, the UK mining sector is 27% below its 2013 peak, and exactly half the level reached in 2008. Suddenly all those theories of the commodity super-cycle are looking threadbare.”
So where did it all go wrong? Well for starters, says Tom, “mining has always been a cyclical business… when the mood is positive investors pump money into the sector, fund managers are flush with cash and can barely invest it quick enough. Today fund managers are facing redemptions, they are forced to sell shares even in those companies that they like, and they certainly do not have the funds to invest in new ventures.” This cash crunch then hits junior miners, preventing them from developing projects.
Another factor, says Tom, is China. The Middle Kingdom is the biggest consumer of most commodities, meaning that in the last few years natural resources have been a play on its economic growth. And, unfortunately for anyone invested in the sector, China’s economy looks like it’s in trouble. “Growth is slowing, and only last week rumours were circulating that the Bank of China was defaulting on its loans.” It’s never good for business when your biggest customer has money problems. Even more worrying for commodity bulls is that this isn’t just about a slip up in growth. “China is facing a difficult transition from being a cheap manufacturing base to an economy with a bigger farming and service sector.” In the longer-term this transition doesn’t bode well for commodities, says Tom.
Bill Gates’ next big investment
As you can probably tell, Tom’s not feeling too bullish on miners right now. But he’s not all doom and gloom. Indeed, he’s actually excited about an emerging tech sector, with much more inviting investment prospects. Tom isn’t the only one optimistic about this area. Bill Gates – a man who practically invented the computer age and made $60bn in the process – has just invested hundreds of billions of dollars into this fast-growing industry. This is why Tom and Bill Gates are so excited.
Four reasons to keep faith with emerging markets
Unlike miners, emerging markets have had an excellent 2013. If you’ve been reading The New World, a free weekly email dedicated to hunting out the most exciting investment stories in Latin America and South East Asia, you’ll likely have benefited from the trend. However, fears of the Fed tightening its monetary policy have hit the emerging markets hard recently. So in this week’s New World, my co-writer Lars Henriksson explains why investors shouldn’t panic.
“One thing that should put us at ease”, says Lars, “is that over the last decade emerging market funds have recorded two big sell-offs (in 2008 and 2010) and both were followed by strong inflows the following years.”
There are four main factors that make Lars confident about emerging market prospects.
1) The latest BoA Merrill Lynch Global Fund Manager Survey shows that fund managers have slashed exposure to emerging market equities to the lowest since December 2008. This level of bearishness tends to result in a bounce.
2) The bond sell off means capital is leaving emerging markets. This gives central bankers scope to “to cut/hold interest rates, underpinned by weaker commodity prices which are major components in calculating inflation in Asia”.
3) A switch from bonds to equities is likely if US economic growth continues to surprise on the upside and this should push up Southeast Asian shares.
4) In the longer-term, firms in the Association of Southeast Asian Nations (ASEAN), will benefit from the landmark free trade agreement that will encourage greater integration, specialisation and competitiveness.
To be fair to Lars they’re four compelling reasons. It is perhaps little surprise that he’s convinced that, despite the recent sell-off, there are big, big gains to be made.
Lars goes into more detail on just why he think ASEAN shares will do well. You can read the piece in full here.
As for my patch, Latin America, it's also been affected by the emerging market sell off. In some cases investors are probably right to be worried but for one select group of countries I actually think the panic represents a buying opportunity. I covered this in depth in the latest MoneyWeek cover story. Subscribers can read it here or if not click here for a three-week free trial.
And finally, before I go, I’d like to flag our latest video tutorial. In recent weeks deputy editor Tim Bennett has been explaining the different ways investors can value a company. This week he introduces the king of these techniques - discounted cash flow (DCF). It’s well worth a few minutes of your time.
Right, that’s it from me.
Have a great weekend,
James McKeigue
Senior Writer, MoneyWeek
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