MoneyWeek roundup: Europe’s ‘Asian crisis’ rattles the markets

Europe’s ‘Asian crisis’ rattles the markets… The most frightening meeting Tim Price has ever had… A stock for every serious investors’ portfolio… The jargon you’d like to ban…

John Stepek highlights the best news and views from the MoneyWeek team. The markets tanked as Greece kicked off Europe’s “Asia crisis”, Tim Price told us all about his scariest meeting ever, and Merryn Somerset Webb finds a way RBS shares could be used… by babies.

● The turmoil in the markets worsened this week. On Thursday and Friday, investors were gripped by fear as concerns about Greece going bust boiled over. We covered this pretty widely in Money Morning and on the website. But to cut a long story short, the Greek government said it would slash its deficit, the European Commission approved its plans, and nobody believed a word of it. Especially when half of Greece promptly went on strike, or said they planned to.

Worse still, people are starting to suggest this might be the equivalent of Europe’s ‘Asian crisis’ (if you want to read more on that by the way, there’s an old briefing on the MoneyWeek website which explains it – The Asian crisis: have lessons been learnt?). The main problem is that it’s not just Greece. There’s Portugal, Spain and Italy to worry about too. And then you’ve got the banking systems in each country, and their relationship with the rest of Europe’s vulnerable financials. No wonder investors took fright.

● But for a really scary story, you had to read Tim Price’s latest Price Report. Tim, who’s in the wealth management business, spilled the beans on the most frightening meeting he’s ever had with a prospective client. And what makes it really scary, is that this meeting took place just a couple of months ago, right before Christmas.

This man had worked for 30 years as a bank analyst for a large UK investment bank, before retiring not long before the 2008 bust, says Tim. “He was right in the heart of the City when it was about to go over the edge. And he knew what was coming. A couple of years beforehand, he had an epiphany about just how bad the fallout would be. And he immediately decided to take measures to protect himself.” The bust is over now though, right? Wrong. According to Tim’s client, the “financial crisis is not over by a long shot. ‘We’re in for a decade-long deflationary depression.’”

Now Tim’s not quite that bearish. But he’s in no doubt that tough times lie ahead. “Very few people, outside the world of finance, have yet to accept what sort of austerity measures may be looming in the UK. We know that taxpayers face growing obligations to the State. We know that public spending must be severely reined back. But it hasn’t quite sunk in yet that we need to prepare now for some really horrible years ahead.”

● There are steps you can take to prepare, says Tim. Buying gold is one. And getting rid of any UK government debt (gilts) you hold is another. But James Ferguson (who writes the Model Investor newsletter) is not so sure that gilts are really the investment-disaster-in-waiting that everyone says they are. He thinks that Bill Gross, the world’s biggest bond investor, who warned last month that gilts were “resting on a bed of nitroglycerine”, is just talking his book. James and Tim go head-to-head in this week’s MoneyWeek magazine (claim three free issues here) to debate whethe r he’s right or wrong.

● One thing’s for sure – Mr Gross knows how to generate column inches for his views. That “nitroglycerine” quote made it into every UK newspaper, from the broadsheets to the red-tops. So much so that my colleague Eoin Gleeson said we should add it to our “banned” list. To put you in the picture, like most publications, MoneyWeek has a list of “banned” words and phrases that we avoid putting in the mag – clichés, meaningless jargon and the like. Eoin reckons “bed of nitroglycerine” is well on its way to becoming as ubiquitous as “weapons of mass destruction.” I realise I’m opening up a can of worms here (there’s one) but if you’ve any suggestions for words you’d like to see banned from these parts, feel free to email me at the usual address:

● Of course, all that fear hasn’t spread to the British property market yet. House prices rose for the seventh month in a row in January, according to Halifax. But Tom Bulford’s not planning to buy property stocks for his Red Hot Penny Shares portfolio (find out more about Red Hot Penny Shares here). In fact, he reckons you should avoid them. We all know the arguments about interest rates rising. But “there is one other negative factor often overlooked. Last year the average deposit paid by a first-time buyer was £29,000. Where did most of this money come from? Mum and dad.

“But, unfortunately for first time buyers, mum and dad are living longer and longer. They are enjoying a busy, leisurely and frankly expensive retirement while they can. They’re doing this before they end up in a care home where they will be depleting the family fortunes at a rate of about £30,000 per year. I just don’t see how it is possible for people to live longer without being left with less to hand down to the next generation… Property has outperformed shares in the last decade. But don’t bet on a repeat in the next ten years.” You can read Tom’s article in full here: Take a chance on property? Thanks, but no thanks.)

● Elsewhere amid the market upheaval, several big stocks reported, including big pharma groups GlaxoSmithKline and AstraZeneca. Glaxo’s results were pretty good. Astra’s dismayed investors. But both are suffering from ‘big pharma’ problems – blockbuster drugs, losing patents and a lack of new drugs to replace them. I’m happy to stick with these stocks – ultimately they have no choice but to sort out their problems, and in the meantime you can get a decent dividend payment for holding them.

However, you can also make money by buying into the companies who are profiting from big pharma’s woes. This week’s MoneyWeek cover story looks at three such companies (claim your first three issues free here), including a ‘picks and shovels’ stock doing research and clinical trials for big pharma.

Another company that’s doing well out of the ‘patent cliff’ is Israeli group Teva (Nasdaq: TEVA). Teva makes ‘generic’ drugs – the copycat pills that snatch all the business from big pharma groups once the patents on their best-selling drugs run out.

Dr Mike Tubbs, who writes the Research Investments newsletter, reckons that Teva should be in any serious investors’ portfolio. The group is facing a lawsuit from biotech giant Gilead over Teva’s generic versions of two of Gilead’s drugs. “Now this might sound negative. But remember that a good generics company needs to continually challenge large pharmaceutical company patents. If it succeeds in getting a patent declared unenforceable, it gains a 180-day period of exclusivity in the US market which usually results in the generic company gaining the largest generic market share. And this strategy works for Teva.”

● Also in this week’s magazine, we dropped corporate bonds from the MoneyWeek strategic portfolio. To put you in the picture, the strategic portfolio is not an exhaustive list of everything we like – we’ve recently written approvingly of agricultural stocks for example, and there are more general trades such as going long the dollar that aren’t on it. It just gives a broad overview of the asset classes where we think you should be investing. Right now it’s got gold, Japanese stocks and defensive stocks in it.

We’re not saying it’s impossible to find value in areas of the corporate bond sector, or even that the bottom is going to fall out of the market imminently. However, we now feel that the potential risks to corporate bonds outweigh the potential rewards. When we put the sector into the portfolio in February 2009, the market was pricing in Depression-scale bankruptcies. Now that’s not the case.

It seems to us that two things can happen from here: either the economy turns back down, or a convincing recovery takes hold. If it turns back down, fears of bankruptcies will rise again, and corporate bonds will sell off. If it turns back up, inflation will become a problem, interest rates will have to rise, and corporate bonds will sell off as they lose their attractions. So either way, we feel the sector’s best moments are behind it for now.

● And on our blog this week, Merryn Somerset Webb had a suggestion for what to do with all that Child Trust Fund money that’s just sitting about waiting for today’s infants to turn 18 and go spend it on alcopops. “Why not stop giving newborns cash in their CTF and hand them a few thousand RBS shares instead?”

Suddenly, reasons Merryn, everyone would have a reason to learn about shares and pay attention to the banking sector. They’d also “agitate for a financial system that guarantees that individual banks will survive over the long term. After all, if they’re going to be holding their shares for going on two decades they won’t be interested in quarterly reports. They’ll be – as all shareholders should be – interested in steady dividend payments and in long-term sustainable growth.”

But one reader wasn’t keen on the idea: “What have you got against kids? The bank is bust. The sooner we recognise that, flog off the decent bits and then fold the company the better. I’d rather have the £250 for my bouncing baby boy and invest it in something that isn’t bankrupt.”

● Enjoy the rest of your weekend. My colleague David Stevenson will be back on Monday, looking at why Greek debt is far from the only thing the markets should be worried about.

But before I go, I just have to leave you with this. It’s Austrian economist Friedrich Hayek facing off with macroeconomic hero-du-jour John Maynard Keynes – in the form of a rap video. Frankly, I’m not sure what to make of it, but the Austrian economists at the Mises Institute reckon it has the substance of the debate down to a tee.

Useful links. Want to find out more about any of the MoneyWeek newsletters and contributors I’ve quoted today? Just click on these links:

Tim Price’s The Price Report
James Ferguson’s Model Investor
Tom Bulford’s Red Hot Penny Shares
Merryn Somerset Webb on The MoneyWeek Blog
Dr Mike Tubbs writes the
Research Investments
stock picking newsletter, which focuses on research & development-driven firms.

Dr Mike Tubbs’ Research Investments 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. Please seek independent financial advice if necessary. Customer Services: 020 7633 3600.

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