● It’s been another event filled week. In Europe, governments toppled. In the Middle East, fears grew over Iran’s nuclear ambitions. No wonder markets were volatile.
The trouble about this, says The Price Report author Tim Price, is that paying too much attention to short-term news flow can be “toxic for a private investor”.
“It’s easy to get drawn in by the constant buzz of financial news. You may feel like you have to absorb as much of it as you can, just for the good of your portfolio”, says Tim. But this can be dangerous. It encourages you to tinker with your portfolio, incur more trading costs and also make decisions at the wrong time.
“I am convinced that these ‘siren songs’ affect all types of investor – the private investor trading from home as well as the proprietary bank trader perched in front of a Bloomberg terminal. Knowing that the markets are prone to what amounts to random noise in the short term should give us the confidence to ignore random price action in the short term, too.”
So what’s the answer? Tim believes that we need to “learn to put some distance between ourselves and the addictive, noisy motion of the markets. By focusing on the two or three really big stories that matter, we can avoid making mistakes that could wipe out the wealth of many investors in the year ahead”.
Tim recommends that you should “identify a variety of assets across a variety of asset classes, and then just leave them alone”. Indeed, he has already found a range of bonds, stocks and commodities that he believes will do well. It wouldn’t be fair to his subscribers for me to list them here, but if you are interested, you can hear more from Tim here.
● But ignoring investment news is easier said than done. Especially with something as dramatic as the eurozone crisis.
This week, it forced both the Greek and Italian governments out of office. And Italy’s problems are bad news for the eurozone, says John Stepek in Thursday’s Money Morning: What does Italy’s crisis mean for your money? After all, “if Italy is deemed to be bust, then few other countries are safe”. France could be the next target, and that really would be a tipping point.
And when you break it down, there can only really be one of two broad outcomes.
“If Germany gets its way, then the European Central Bank (ECB) will not be allowed to print money and bail out the frailer members. As a result, those eurozone members who can’t survive under a hard currency will end up leaving.” The other option is that Germany gives in and allows the ECB to print money. Then “the euro will weaken sharply. Germany may even leave the eurozone in disgust, which would result in the euro being even weaker”.
What does that mean for your investments? “If the ECB ends up doing quantitative easing (QE), we’d expect to see a huge rally in stocks – that’s what printing money does”, says John. “If the ECB doesn’t, and some countries drop out of the euro, it would be very deflationary. We’d probably see more printing from the US and the UK to compensate, but it wouldn’t bode well for the banking system.”
In the meantime, you should position your portfolios defensively, says John. “Hold some gold as a defence against more money-printing. Hold quality blue chips that can sustain their dividend yields even in the face of very tough economic conditions. Have some exposure to the US dollar – when the world is on the edge of financial disaster, it’s still the place that most investors run to.”
“And hold on to cash. Yes, it’s painful at a time of high inflation, but you’ll need it to take advantage of the investment opportunities that will almost certainly arise as this crisis plays out.” Later this month in MoneyWeek magazine, we’ll be getting in a group of Europe experts to give their views on how things will develop and to tip their favourite stocks in the region. Look out for it – and if you’d like to become a subscriber, you can claim your first four issues free here.
● There’s one opportunity that’s already on our doorstep, says Bengt Saelensminde, who writes our free investment newsletter, The Right Side. He’s talking about UK corporate bonds – which are issued by UK companies to raise money.
“Too many people ignore bonds in favour of shares”, says Bengt, “but I think they’re a vital area for investors”. Bengt likes corporate bonds because they offer more security than stocks, and in some cases, more income. In other words, if a business goes bankrupt, bondholders get their money back before shareholders. Sure, such bonds aren’t danger-free, says Bengt. But “with inflation eroding the value of savings, I think it’s time to take a bit more risk and seek out some higher returns in the bond market“.
Bengt’s top bond pick right now is the Enterprise Inns 6.5% December 2018 bond. He calculates that if you buy now and hold it until redemption you’ll make 12% per year. To find out exactly how Bengt comes to that figure read the piece in full here: The pros and cons of investing in retail bonds.
● Contrarian investors may also want to consider David Stevenson’s latest tip. Right now the banking sector, especially in Europe, is hated by investors. Share prices have plummeted as investors, quite rightly, worry how the overstretched banks would be affected by a major sovereign default. Yet not all banks should have been sold off so much, says David in Friday’s Money Morning: Invest in a European bank? It’s not as mad as it sounds.
Take Sweden. The country had learned its lessons from a big banking blow-up in the 1990s, says David. “Sweden got its act together on its banks at the start of 2009. Seeing that there were potential problems ahead, it recapitalised lenders via a mix of private money and state support.”
“Further, the government made sure of something else early on. Any Swedish bank that joined the state-organised scheme had to stop paying bonuses and freeze top management’s pay.”
As a result, “the country’s banks are better capitalised than most of their European and US rivals, and have better access to funding markets and a lower risk of default”. Yet despite their plus points, Swedish banks have been dragged down by the overall turmoil. In particular, David likes Nordea Bank (SS: NDA). It looks good value on “a current year p/e of just nine and with a prospective yield of 5%, which is forecast to rise to 5.7% in 2012. For a bank these days, that’s a very decent dividend“, says David.
Of course, you can only spot anomalies and investment opportunities in a crisis if you fully understand what’s really going on and pick up the early warning signals. One of them is the credit spread. Tim Bennett explains how this works here.
● Another way to negotiate a crisis is to hire an expert. Here at MoneyWeek we have a range of them, all with their own investment styles. One of our best stock pickers is Dr Mike Tubbs and his Research Investments newsletter. And we have a great offer for you here right now – 30 days access to Research Investments for just £1. If you’re interested, click on the link to find out more.
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.
● Scotland’s politicians could learn from the European debt saga, blogs MoneyWeek editor-in-chief Merryn Somerset Webb. Alex Salmond is determined for Scotland to gain independence. But “will it be the new Greece?” asks Merryn.
“If Scotland votes to go it alone, they will end up with either the euro or the pound as their currency. The latter is more likely than the former, given that there is no legal reason to think that any arrangements Westminster has made with Brussels would extend to Holyrood.”
“So while Scotland’s government would get to tax and spend at will (for a while at least), interest rates and the like would probably end being set for Scotland by the Bank of England rather than the ECB.”
Why does this matter? Because “Scotland would end up with something everyone in Europe is really wishing they didn’t already have: monetary union without fiscal union”.
The idea of Scottish independence drew a mixed response from readers. Maxx wondered if it would benefit England. Alex felt that Scotland’s oil & gas reserves would stand it in good stead if it were independent. “Presumably Salmond et al model Scotland more on Norway than Greece. There is growing evidence of far more in the way of remaining hydrocarbons in the North Sea basin than previously thought.”
If you haven’t read the blog, you can do so here: Scotland: will it be the new Greece? and join the debate – it could run and run.
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Have a great weekend!
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