In my last letter before I went on holiday two weeks ago I noted that worriers had a long summer ahead of them. There was, among other things, the risk of contagion from the US subprime crisis hitting global markets. Then there was the risk of interest rates rising in the UK faster than most people would allow themselves to expect as China started to export inflation and food prices rose around the world. Plus the risk that the yen carry trade would start to reverse, and so on.
But I didn’t expect all those worries to ruin quite so many holidays quite so soon. In the short time I’ve been stomping through the relentless rain that is passing for summer in Shetland this year, the credit crisis we have been fussing about for months at MoneyWeek has finally kicked in. The FTSE 100, despite a recovery over the last few days, is still 5% off its highs, our own subprime crisis is quietly unfolding and global bond markets are a mess.
At the same time, the market has been forced to accept that UK rates will go to at least 6% (Mervyn King all but promised it at a press conference on Wednesday) and it is becoming increasingly clear that even that might not knock inflation out of the system. CPI has been above target for 14 months and is likely to stay that way for some time; the oil price is back in the high $70s; prices of Chinese imports have been rising; and food prices are clearly on the up, a situation that will be made even worse in the UK than elsewhere, thanks to the floods and now the return of foot-and-mouth disease. Indeed, pretty much the only positive thing I have read in the papers since my return is that there is a chance that retail spending growth (which was its weakest in nine months in July) might be boosted by 2% in the second half of the year as flood-hit householders spend their insurance cheques on new sofas and the like.
So what is an investor to do? Bill Bonner would say you should buy gold and batten down the hatches. James Ferguson firmly disagrees. Now, he says, isn’t the time to panic but to buy – in particular to buy the FTSE 100. He suggests, for perfectly sensible reasons, that you consider buying a tracker (or perhaps an ETF, they’re cheaper). But I think I might be tempted to focus a bit more and just pick up some of the big, diversified miners at bargain prices. Chinese growth is still robust (GDP was up 11.5% in the second quarter) and, as we know, rising commodity prices are all about China. There are endless statistics around to support the case that we are still only at the beginning of a commodity supercycle (per capita, the US still uses three times as much aluminium as China, for example) and I have yet to see an argument that persuades me we aren’t. So I’d take this chance to buy into the likes of Xstrata, which is still over 10% off its highs and on a forecast p/e of just over eight times. I’ll be topping up the holding in my Sipp.