To save you the bother of scrolling through endless pages of pundits opining on the eurozone, here’s all you really need to know about today’s latest last-ditch summit to save Europe: all the talk of treaty rewrites is irrelevant.
It’s all very well saying that countries need to be held to stricter rules, but that doesn’t do anything to get them out of the mess they are in right now.
Until the European Central Bank (ECB) prints money to buy the region’s dodgy debt, the crisis won’t hit a turning point. And yesterday, Mario Draghi, the head of the ECB, made it clear that he’s still not keen to do that.
That’s why stocks tanked yesterday. And it’s why – almost regardless of what happens today – the eurozone crisis seems likely to rumble on and on.
That’s bad news for Europe, of course. But it’s not great for us here in the UK either.
Things must be bad – even Tesco is feeling the pain
With eurozone quantitative easing still off the menu for now, stocks across the world slid yesterday. The S&P 500 fell by more than 2%, while the FTSE 100 shed 1%.
The icing on the cake was the revelation that Europe’s banks need to raise even more money than the European Banking Authority had thought. The banks are short of €114.7bn, rather than the €106bn the regulator had previously estimated.
The situation would be grim, even if the rest of the world was in peak economic condition. Unfortunately, it’s not. The US remains fragile, and looks vulnerable to a downturn early next year. China is starting to wobble.
As for Britain, well, let’s just say that chancellor George Osborne has his work cut out for him. Even without the threat of Europe going bust on our doorstep, the UK is in a tight fix. Households and the government are hugely weighed down by debt.
Meanwhile, the Bank of England’s money printing might have propped up the gilt market, but it’s hammered the pound, which in turn has driven up our cost of living.
Consumers are being squeezed so badly between low wage rises and rising inflation, that even the mighty Tesco is feeling the pain. The company’s third-quarter results for the 13 weeks to 26 November showed that like-for-like sales (excluding new stores, VAT and petrol) were down 0.9% on last year. That’s the fourth quarter in a row that same-store sales have fallen.
Now, Tesco is hardly in danger of losing its place as the country’s top grocer. And with a prospective yield of 3.9%, we see no reason to sell it if you own it. (Although if you have more of a trading mindset, my colleague Tim Bennett reckons the share price could have further to fall in the short term).
However, Tesco’s trials just go to show how tough it is out there at the moment. And with the added threat of a European collapse apparently set to hang over us for a long time to come, what can British investors do?
Investing for hard times
Well, one simple option is to look for stocks that do well in hard times. We’re not just talking about defensive plays – we’re talking about companies that positively relish a recession. In this week’s MoneyWeek magazine, my colleague David Stevenson looks at a number of these ‘bad news buys’.
One such stock that I find particularly interesting is Provident Financial (LSE: PFG). Provident is a ‘non-standard’ lender – in other words, it lends to customers that more mainstream providers won’t touch. This can be a controversial business area. But the fact is that Provident provides a service that people need, and it’s good at it.
The stock has been heavily shorted by hedge funds expecting the company to blow up in the face of tougher times in the economy. However, so far they’ve been badly wrong. What the short-sellers perhaps fail to understand is that a company like Provident is actually far better at coping with this sort of environment than a normal bank.
Banks deal largely with mainstream customers in regular employment. In the good times, lending standards are relaxed, and people find it easier to get credit. When the economy turns nasty, and some of those people lose their jobs, the potential for bad debts to rise rapidly is high.
But even at the best of times, Provident’s bread and butter business is to lend small amounts to people who are on the margins of the economy, and often in temporary or casual employment. So in terms of credit control, it always has to be on top of its game, because its customers’ financial situations are already precarious by mainstream standards.
So it’s one of the few financial stocks that should hold up rather well in this sort of environment. And that’s been the case – it’s done very well throughout the financial crisis and beyond. But is it still a buy? You can find out what David thinks, and read the rest of his tips, in the latest issue of MoneyWeek, out now. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
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