I’d love to rattle off a great long piece dissecting the Pre-Budget Report for you this morning, but I’m afraid there’s not much to say.
Absolutely nothing of consequence will be tackled until after the election. At that point, assuming things stay the same, we’ll all pay more tax. We’ll probably end up with worse public services (unions are unlikely to take the proposed pay cuts sitting down, for one thing). And our pensions will be primary targets for yet more government pillaging.
That’s the short version – I’ll leave it to my colleague David Stevenson to go into more detail on our blogs page: Darling ignores Britain’s biggest problem – debt. But for now, let’s look at what else was going on in the world while Alistair Darling was making his party political broadcast from the Pre-Budget pulpit…
Fear returns to global markets
While Britain was gamely ignoring its own nasty-looking budget deficit, global jitters continued over more obviously troubled countries.
Stock markets across Europe ended the day lower, after Spain had its credit rating outlook downgraded from ‘stable’ to ‘negative’ by ratings agency Standard & Poor’s. In other words, the agency didn’t actually slash Spain’s credit rating, but it’s getting closer to doing so. S&P reckons that Spain’s government hasn’t yet done enough to tackle the state of its finances or the economy, and so both will deteriorate further than expected.
Meanwhile, Greece – which is in a far worse state – is under heavy pressure to deal with its deficits (you can read more on Greece’s problems here: The biggest threat for 2010 – countries going bust). And while Darling was trying to distract the electorate with taxes on bankers’ bonuses, his counterpart over in Ireland was outlining one of the most brutal budgets his beleaguered country has ever seen.
In his second emergency budget in eight months, Irish finance minister Brian Lenihan cut public sector pay by up to 6%. Benefits were also cut. And there was even a 20% pay cut for the Taoiseach. (Although the fact that the head of the Irish government is among the best paid leaders in the free world, does give you some idea of why Ireland needs to cut public sector pay so sharply now). Ireland’s economy is set to shrink by 7.5% this year, but Lenihan hopes that the cuts should prevent the budget deficit from rising above 12% of GDP – the EU has given Ireland until 2014 to get its deficit back below 3%.
Special FREE report from MoneyWeek magazine: When will house prices bottom out – and how will you know?
- Why UK property prices are going to fall 50%
- When it will be time to get back in and buy up half price property
Dubai’s problems aren’t going away
And across the world, getting back to where the recent surge in fears over sovereign debt kicked off – concerns over Dubai aren’t going away. The emirate saw its stock market take a sharp tumble yesterday. It fell by around 6%, as Nakheel, the troubled developer behind the palm tree island development, reported a £2.25bn loss for the first half of the year.
Meanwhile, Dubai property developer Emaar Properties abandoned a planned merger with three real-estate divisions of Dubai Holding, a conglomerate owned by Dubai’s ruler. According to the FT, analysts reckon the news makes it more likely that Dubai Holding could be the next group to need to restructure its debts, after Dubai World. So there could certainly be more nasty surprises from that direction.
How to play this
What does all this mean for investors? With general debt worries rising and few governments in the mood to tackle them, markets are likely to remain jumpy and vulnerable to more shocks. And as Dominic Frisby pointed out in yesterday’s email, for most of this year, one thing has gone up when everything else has gone down – the dollar.
So how do you play this? You could take a look at spreadbetting (you can find a list of various providers here). But do always bear in mind that while it does have some advantages (it’s tax free and it can be quite good fun – when you’re winning), your losses are theoretically unlimited, so you need to be very careful. If you are tempted, then given the various emerging problems in the eurozone, shorting the euro versus the dollar would be one option to consider.
You could look at buying US stocks too. But the broader stock market looks overvalued (by 40% or so, reckons Andrew Smithers, who has a decent track record on these things).
An easier way for British investors to get exposure to a stronger dollar is simply to buy stocks that will profit from it. Big pharma is among the most obvious candidates – stocks such as AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK). The nice thing about these companies is that they’re also defensive plays with decent dividend yields, so wider fears over the economy should have less impact on them.
Our recommended article for today
Prof it from Brazil’s rising middle class
Many people are seeking ways to turn a profit from China’s increasingly affluent population. But there is another emerging market which promises greater rewards. Louis Basenese explains why Brazil is a better bet than China, and tips the sectors to put your money in now.