MoneyWeek Roundup: The market is in turmoil

● At last, some good news from the Middle East this week. Libyan rebels gained the upper hand and overran Muammar Gaddafi’s forces. Until the ‘mad dog’ is caught the drama isn’t over, but the bulk of the conflict certainly is. And in the news section of this week’s magazine, we look at the effect this could have on oil prices. Sadly, this one glimmer of hope won’t stop global growth, and the post-crunch recovery, evaporating across the ‘advanced’ economies.

● Nonsense, says Tim Price in Friday’s Money Morning. The recovery isn’t slowing as such. The truth is it never got started. Economists might claim that the US Great Recession ended in July 2009, but “as far as I am concerned, the Great Recession is still rumbling on“. As Tim points out, 14 million unemployed Americans would probably agree. So would the owners of more than 25% of America’s houses who now find themselves in negative equity.

Meanwhile, Britain is not much better off. The fact is that the “debt-hobbled” West has gone “ex-growth” and the situation won’t improve anytime soon. Meanwhile, emerging markets, particularly those in China, are roaring. The question is – for how much longer? “If Western markets continue to slow, that will have an impact (especially on China). But over the medium term it will merely give developing markets, China included, an extra incentive to develop and nurture their own domestic demand.”

So what’s an investor to do? The obvious play would be to “pile into China” but that might be unwise. Perhaps the most perverse fact in investment is that there is no proven correlation between economic growth and stock market performance. “That might sound extraordinary”, says Tim, “but it is true.”

Research shows that “over long periods of time and expressed in real terms, stock market returns and growth in GDP per head are actually negatively correlated.

“In other words, the faster an economy is growing, the worse the stock market returns.

“So although it seems rational to expect emerging markets to grow more quickly than the slow growth, debt-ridden economies of the West (and also to expect those markets to become richer), that is not the same thing as saying that their stock market returns will necessarily be higher.”

So how can you profit from emerging market growth? Tim reckons the best option is to “own shares in businesses who are based in the West, but who do a lot of business in the East”. In other words, “companies which transact a significant and ideally growing amount of business in the faster-growing developing world.” Another advantage of Western shares is that their corporate governance and accounting standards are higher.

We discussed the best Western plays on emerging markets in a recent MoneyWeek cover story. You can read the piece here: 14 stocks to buy as East overtakes West (If you’re not already a subscriber, subscribe to MoneyWeek magazine.)

● Before yet more volatility hits your investments hard, it might be time to consider protecting them. One popular method is to buy options or covered warrants. In his latest video tutorial, deputy editor Tim Bennett explains how they work, and discusses whether or not they are the best tools for the job.

● Another great insurance policy in times of turmoil is gold. MoneyWeek has been backing the yellow metal for almost a decade. Anyone who bought in when we first tipped it will be sitting on some very nice profits now. Of course, paper profits only become cash profits when you sell. And the higher gold climbs, the more readers ask if now is the time to sell. Especially given this week’s $200 correction in just three days after a huge surge. On Monday, resident gold expert Dominic Frisby gave his verdict.

“I can draw a million and one charts showing why you should sell gold now. But the fact is we still have a long way to go before we reach the end game.” Any regular readers of Dominic, or indeed the magazine, will know why. “House prices still have further to fall relative to gold. Stock markets have further to fall relative to gold. We still have negative real rates. Governments are still spending money they don’t have, then debasing their currencies to cover the deficit. The financial system is coming under a force of pressure it will not be able to withstand.”

Of course, between now and gold’s eventual top there will be plenty of twists and turns, warns Dominic. “It’s trading at the top of its range; yes, it could easily pull back to $1,400 and there would be no technical damage to the long-term chart.” But investors need to “Be right and sit tight. Stay on the train – maybe rollercoaster is a better metaphor – and enjoy the ride. The bull will try and shake you off in all sorts of different ways. Don’t let him.”

Well, since Monday the bull certainly has been shaking off investors. Gold posted some of it’s biggest one-day losses since 2008.

Has that changed our opinion? No.

● As Merryn blogged on Thursday: “you might want to remember why you bought gold in the first place (because you don’t trust central bankers to protect your money) and ask yourself if anything has changed”.

As usual, the blog as attracted plenty of reader comment.

Ellen was keen to put the recent sell-off in perspective. “Gold moved up very quickly in the last month, probably too quickly, partly as a reaction to the debt ceiling crisis that was going on in Washington. It has fallen back a bit since then but only to the levels they were a couple of weeks ago.” Broadly agreeing with Merryn, she sees gold as “insurance policy against monetary policy that attempts to socialise government debt and banking losses onto the rest of us. That hasn’t changed yet”.

However, Chester isn’t so sure. He thinks we are heading for deflation and notes that “gold is not an asset to hold in a deflationary depression”. He advises anyone who bought at $300 – $500 an ounce to “hold gold and buy more when current price levels fall to that range again. If you bought above that range, sell now”.

But for us goldbugs at Moneyweek the recent drop is a buying opportunity. Dominic Frisby’s latest gold report looks at the best ways to invest in the yellow metal, and gives tips on the miners to buy now.

● Another asset that appears to have withstood the recent market turmoil is commercial property, says David Stevenson. “Average values in Britain’s commercial property sector – that’s offices, warehouses and shops – have now climbed by some 17.5% since their lows in the summer of 2009. And some parts of it have enjoyed something of a purple patch, central London office space in particular.”

We’ve long been bearish on the sector – is it time to change our tune? “Certainly not yet”, says David. The recent rise needs to be put into perspective. “Sector prices are still down by almost 35% from their mid-2007 highs. Since that top for the UK commercial property market, shareholders in quoted real estate investment trusts (REITS) have lost almost 70% of their money. Indeed, investors in the sector have made hardly any capital gains overall since 1993.” Ouch. Moreover the “pick up in prices appears to be losing steam. Last month saw the smallest improvement in overall values since the recent recovery began in 2009. Indeed, over the last year, capital growth in commercial property has slowed to just 1.9%”.
Given the headwinds facing the UK economy, we’re not too keen on the market for the foreseeable future. But there is still a way to make money from it. “However bad things get, it will still have to maintain insurance cover on its buildings. So why not buy shares in the country’s largest property insurer?” Insurance group, RSA (LSE:RSA) looks good. For more information about the company, read David’s article in full.

● Meanwhile, those of you who lived through the 70’s and find the current threat of stagflation depressingly familiar may want to check out this video.

Enjoy it and have a great bank holiday weekend,

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Have a great weekend!

• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• David Stevenson

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