From ways to profit from sterling’s woes, to the pending devastation of Europe’s car industry, MoneyWeek writers have had a lot to talk about this week. John Stepek picks out the best stories from across the website, blogs and newsletters, and considers the rights and wrongs of ethical investing.
● Well, the election date wasn’t called last weekend, as rumour had it. But we did learn from various opinion polls that the Tories are coming ever closer to losing the next election, or at least sharing government with a motley crew of LibDems and Labourites. That jolt of uncertainty saw sterling start the week by falling heavily out of bed, before rebounding a little by Friday.
● The pound’s slide certainly gave us a lot to write about. In Money Morning, I looked at why trading the currency markets is tempting but potentially lethal – although having had a crack at it myself, I’ll admit it can also be fun.
Meanwhile, both Dominic Frisby (Is Britain sliding towards hyperinflation?) and Paul Hill in his Precision Guided Investments newsletter, warned that a currency crisis could well lead to higher interest rates and a double-dip recession. If we get a hung parliament, warns Paul, a plunge in sterling could drive inflation a lot higher. “In fact I think we are likely to see CPI rising to 4% in the year ahead.” And it “would take some very tough medicine to bring this inflation under control. The only practical solution would be a Bank of England U-turn – simultaneously hiking interest rates and reversing its QE measures.” But what if politicians get in the way? Well, “it’s pretty simple. If the Bank of England doesn’t do its duty, the pound will crack. That would trigger a crisis that would rival what happened in Iceland – so adopting a similarly hard line as that imposed by Ireland or Greece is by far the lesser of the two evils.”
● Grim stuff. But as ever, there are ways to profit. And it doesn’t have to involve spread betting. Bengt Saelensminde told readers of his free email, The Right Side, that there was a way to bet on a sterling fall, with limited or no downside if you get it wrong. How? Buy pharma giant GlaxoSmithKline (LSE: GSK). As Bengt points out: “GSK has practically no sterling revenue. The table below is taken from their recent accounts. You’ll see that sterling sales are a trifling 3% of the total. Better still, GSK’s earnings are pretty much a diversified basket of world currencies. This is exactly what we’re looking for.”
GSK Earnings by geographic segment. Year ending 2009
| World market by geographic region | Value £bn |
% of total |
| USA | 187 | 40 |
| Europe | 131 | 28 |
| France | 25 | 5 |
| Germany | 24 | 5 |
| Italy | 16 | 3 |
| UK | 12 | 3 |
| Rest of World | 150 | 32 |
| Emerging markets | 66 | 14 |
| Asia Pacific | 20 | 4 |
| Japan | 50 | 11 |
| Canada | 11 | 2 |
| Total | 468 | 100 |
“When all these foreign sales are translated into sterling, the figures just get better and better all the while sterling falls.” But even if sterling doesn’t tank, “GSK is still a top-quality blue-chip player offering a handsome dividend yield with the opportunity for growth.” To read more of Bengt’s investment ideas, sign up free to The Right Side email.
● As for the threat of a double-dip recession, Riccardo Marzi, writing in his Events Trader newsletter, has already got a trade lined up for that. You’ll recall that 2009 was slap in the middle of the worst recession seen in 60 years or more. Yet “last year,” a slightly incredulous Riccardo writes, “more than 14.5m cars were purchased in Western Europe. That was just – wait for it – 1.6% down on 2008.” Where’d all the money come from? Well, that’s easy – from future taxpayers. Scrappage schemes saw governments across Europe (including the UK) bribe their citizens to buy new cars.
But the money runs out soon. And when it does, “the European car industry is due a devastating collapse.” Riccardo’s not finished picking his targets quite yet. But when the time’s ripe, he’ll be telling his subscribers exactly which European car makers they should be shorting.
● You might have noticed that at MoneyWeek magazine, we’re not too keen on Anthony Bolton’s new China fund. Our editor-in-chief Merryn Somerset Webb thinks that both China and the fund are overpriced (if you’re not already a subscriber to MoneyWeek magazine, you can subscribe to MoneyWeek magazine). We’re not the only ones. Tom Bulford in the Penny Sleuth free email is highly sceptical too. “Take the only UK fund manager that many private investors have ever heard of: Anthony Bolton. Now add a hot investment ide a: the “mighty Chinese economy”. That’s got to equal a handsome reward, right?”
Wrong, says Tom. For one thing, “fast economic growth does not necessarily lead to good stock market returns. Just look at the first eight years of this century. The emergence of the Chinese tiger could reasonably have been expected to produce fabulous stock market returns in that time. Yet the Shanghai Stock Exchange actually fell by 10%.”
And China’s not an easy place for foreign investors to get their heads around, says Tom – and he’s had a reasonable level of contact with the region. “I lived in Hong Kong for eight years. It didn’t make me an expert on Chinese business. In fact, I’ve learnt more about it from my Chinese brother-in-law, who has a factory in Szenzhen. He has told me stories that would make your hair curl. Stories of criminal mafia and pay-offs to local big-wigs. Accounting standards are flimsy. Corporate governance is virtually unknown.” No place for the unwary in other words.
● Of course, that doesn’t mean you can’t make money in China. The country is after all, home to the world’s biggest open pit gold mine – the Muruntau deposit in the Tien Shan gold belt. “A lot of gold miners have made immense fortunes in the Shan gold belt,” says Tom. And he reckons he might just have found the next one. He’ll be looking into it in more detail in his Red Hot Penny Shares newsletter.
● Stephen Bland had good news for his Dividend Letter newsletter readers this week. British American Tobacco, which he’s had in the portfolio since November 2008, and is up a respectable 35% or so since then, hiked its final dividend by 19% compared to last year. He still likes the stock, as does my colleague David Stevenson, who mentioned it in Money Morning yesterday: Three stocks to take profits in – and a cheap share to buy.
● Of course, tobacco stocks are controversial. One reader writes: “If there is one reason why I will not renew my subscription to MoneyWeek this year it will be the continual promotion of ‘sinful’ stocks. These sorts of stocks are the primary reason why the world and the financial system is in the mess that it is in. We need to move towards a more sustainable, ethical and honest world – promoting unethical stocks is not the way forward. I understand that MoneyWeek is an investment magazine and therefore does not differentiate in the kinds of stocks reported on, but I am constantly seeing positive articles relating to these sorts of stocks and frankly it is turning me off. ”
Here’s the specific piece that the reader objected to: Why sinful stocks can be good for your wealth. And of course, we do write about tobacco stocks, defence stocks and the like reasonably regularly in the magazine. When we do, we often get emails like this one. I have some sympathy. You might be surprised, but for my own portfolio, I avoid tobacco stocks, and yes, it’s purely for what you might call ‘ethical’ reasons. I just don’t feel comfortable about investing in firms whose main growth prospects depend on their skill at selling cigarettes to teenagers in poor countries.
You might think that’s sentimental nonsense. Or you might whole-heartedly agree. And that’s the whole point. Your take on what’s ethical and what isn’t is up to you, not us. And that’s why, regardless of my investment preferences (or David’s or Dominic’s or anyone else’s for that matter), at MoneyWeek, we’ll present you with what we think are decent opportunities to make money. That’s our number one priority. And there’s no doubt that tobacco stocks have a lot of investment merit.
Furthermore, I don’t think you can blame beverage makers and other vice stocks for being “the primary reason why the world and the financial system is in the mess that it is in”. Rock bottom interest rates, a taxpayer-protected banking system, and governments hell-bent on prolonging booms for as long as humanly possible bear much more responsibility for the state we’re in now than sinful stocks.
I suspect some of you might have thoughts to share on this topic. It’d be fun to get around a table in the local pub and put the world to rights. Sadly I don’t think there’s a table big enough to accommodate us all. So if you want your tuppence worth on this debate, send an email to the usual address – editor@moneyweek.com. Depending on the response, I might set up a blog page where we can keep the argument going…
● Just before I go, if you’ve ever wanted your children to understand how interest rates work, but couldn’t figure out how to explain it, then fret no more. I saw this video on FT Alphaville the other day. It’s a beginner’s guide to the Fed – told through the medium of stick men. And it’s completely serious.
● Useful links. Want to find out more about any of the newsletters and contributors I’ve quoted today? Just click on these links:
Stephen Bland’s newsletter The Dividend Letter