It’s been a bad week for Spain. It began when Argentina nationalised YPF, the South American nation’s second-biggest oil firm, effectively stealing the company from majority shareholder, Spanish oil firm Repsol.
Then the wider Spanish market took a hit when one of Spain’s biggest investors, Florentino Perez, was forced to sell a stake in Spanish utility Iberdrola to repay debt. Traders now worry that Spain’s banks will ask other leveraged Spanish investors to do the same.
Then on Thursday, a weak bond auction showed that not many people want to lend money to the Spanish government. By Friday, yields had gone above the psychologically important 6% mark.
To cap it all off, its all-conquering football teams, Barcelona and Real Madrid, both came unstuck in the Champions League. Not a week to remember, if you’re a Spaniard.
There’s no denying that the nationalisation is “bad news” for Repsol, says John in Wednesday’s Money Morning [LINK]. And it’s not a good sign overall because it will embolden more governments to make similar moves. But believe it or not, this is a trend you can profit from.
“Governments across the world are keener than ever to get what they see as their ‘fair share’ of their resource profits. It’s called ‘resource nationalism’, though ‘theft’ might be a better word in some cases.
“What does this mean for investors? In effect, if governments are going to grab all the best assets for themselves, then it’s bad news for oil companies. However, they’re still going to need external expertise to develop these oil fields.
“And that’s potentially good news for oil services companies.” We looked at this in a recent cover story and unearthed ways that investors can benefit. You can read it here: Profit from the government grab for oil and commodities.
As John points out it’s also another good reason to favour American natural gas producers. “Developed countries are more than happy to jack up tax rates on resource companies. Britain is a perfect example of that. But at least you can be pretty sure as a shareholder that a whole company won’t be snatched from under you.
“Natural gas producers are risky, of course, but oil and gas is a risky sector. I looked at Profit from the government grab for oil and commodities last week.”
My colleague Phil Oakley ran the slide rule over another high-risk opportunity in the sector in the latest issue of MoneyWeek, out yesterday. (If you’re not already a subscriber, you can read it now by subscribe to MoneyWeek magazine).
What’s the European Central Bank up to?
As for Spain, people there are hoping that it can be saved by more money-pumping from the European Central Bank (ECB). However, the ECB’s form of quantitative easing is a bit different to Britain’s: it’s called the long term refinancing operation (LTRO).
So what is it and how does it work? Deputy editor Tim Bennett explains the LTRO in his latest video tutorial.
Commercial property looks grim
Closer to home David Stevenson investigated the prospects for the British commercial property sector. A lot of commentators have been getting excited about Real Estate Investment Trusts (Reits) recently. The value of commercial bricks and mortar has gained 17% since the 2009 lows and last quarter the overall occupier rate – which measures demand for commercial units – rose.
But David is not convinced. “Despite last quarter’s pick up, overall occupier demand is still sluggish, in particular outside London. A lack of tenants wanting to hire commercial space means lower rents. The latest RICS [which tracks the views of chartered surveyors] rentals expectations balance remained negative and points to fresh falls in rental values.
“As buildings are priced on the returns they generate, valuations must keep dropping. Further, extra demand for commercial buildings depends heavily on the amount of available credit.
“Unless banks advance extra loans to buy offices, warehouses and shops, the sector is likely to suffer in the future. And both the latest net lending data and 2012’s first quarter Bank of England Credit Conditions from the survey confirm that the commercial property funding scene remains very tough.”
Obviously demand for commercial property is linked to the overall strength of the economy, says David. And things don’t look good on that front either, with weak external trade, faltering household spending and unemployment all affecting the economy.
The final nail in the coffin could be the sorry state of the high street, says David. “Falling retail sales are clearly bad for store chains. But because most UK retailers don’t own their shops – they lease them – weak consumer spending is also a worry for their landlords.”
David’s gloomy outlook for commercial retail would have serious implications for many investors’ portfolio. I won’t go into details here because it wouldn’t be fair on his Fleet Street Letter subscribers.
Tax before charity
Talking of bad weeks, the government has been having a miserable time dealing with the fallout from the recent budget.
Unlike most, MoneyWeek editor-in-chief Merryn Somerset Webb reckons that George Osborne has got it right on reducing tax relief for charities. “I have just received a letter from my old university. It asks me to send money (as usual). And it adds ‘every £10 donated is worth £12.50 and the difference is paid by the Inland Revenue at no cost to you’.
“No cost to me? I don’t think so. Let’s assume that I am a 40% taxpayer. I give £1,000 to a charity. The government is then obliged to hand over another £250 in Gift Aid, bringing it up to £1,250. I then make a claim for charitable giving tax relief on my tax return for another £250. The net result? The UK Treasury has £500 less in the coffers than it would have had had I not made my charitable donation.”
Merryn notes that while the charity might benefit, it’s being paid for by taxpayers. “The key point is that the government has core responsibilities that must be paid for out of tax revenues. Every penny that goes out in tax relief is a penny not being used to pay for the NHS, for education, for defence and so on.
“You might think that your chosen charity is more important than anything the government spends money on. I don’t think that should be your choice to make. The rest of us don’t get to effectively hypothecate our tax payments (ie, decide what our tax money is spent on directly), so why should those who can afford to make large charity payments get to hypothecate theirs?”
According to HMRC, abolishing Gift Aid could return £1bn a year to the Treasury. Merryn’s conclusion? “George Osborne is right to be trying to limit tax relief on charitable giving. But to my mind, he should go further. He should abolish it. And when he has done that, he should take a long look at charitable status and who should and shouldn’t have it, starting with pretty much every arts organisation in the country.”
It’s a outspoken stance on a controversial issue and unsurprisingly it led to a fierce debate online. ‘Working class hero’ declared that “I would rather give every pound I could to children’s cancer charities, hospices etc than another single penny to the benefit scroungers. The government has no idea how to allocate tax revenue wisely.”
It was a popular view. But Shinsei67 defended Merryn’s standpoint. “If you think governments spend money poorly then elect a better government… I have no problem with you wanting to donate to your local wild fowl sanctuary but why do you require my taxes (which I’d rather went to the NHS and deficit reduction) to subsidise that donation?”
It’s a gripping debate – if you haven’t read the blog then have your say here.
Don’t trust the Bank of England
This week we got another look inside the mind of the Bank of England’s interest-rate setters, says John in Thursday’s Money Morning.
“The job of the Monetary Policy Committee is to keep CPI inflation within 1% either side of 2%. That’s their only explicit goal.”
Yet they keep missing it. And there’s a good reason for that. It’s because Bank chief Mervyn King has other priorities. Just don’t expect him to admit to that.
“He can’t turn around and say: “We’re not hitting our CPI target because we think that’s less of a priority than propping up the banks and trying to grow the economy.” That’s not within his remit.
“All he can realistically say is that the Bank didn’t expect inflation to be at this level – but don’t worry, because it’ll be coming back down before too long. It’s the central banker’s equivalent of saying the dog ate your homework. And to be fair to the governor, he’s got away with this ploy for nearly three years now, so you can see why he keeps using it.”
But minutes from the Bank’s last meeting showed that Adam Posen, a member who has been calling for more quantitative easing, has changed his mind and stopped asking for it. That pushed the pound a bit higher and encouraged the market to expect an earlier rise in interest rates. So can we expect a change in tack?
In a word, no. “The Bank will keep interest rates low for as long as it can. And while inflation remains roughly where it is now – below 5%, let’s say – it’s not scary enough to rattle the public. Don’t get me wrong. Inflation at 3.5% a year will do plenty of damage to your savings if they’re earning 0% interest. But as a headline number, it hardly screams ‘Weimar’ to the man in the street.”
“I reckon that once you start approaching 6%, people start noticing. They start to really worry about getting some protection. They start to ask why the Bank isn’t doing anything. But in the meantime, the Bank will talk tougher, but it won’t actually act.”
That means inflation is going to remain ahead of interest rates, says John, making protecting your wealth more difficult. One way to mitigate that is by using your tax breaks effectively. My colleague Phil Oakley compared the benefits of Individual Savings Accounts (Isas), pensions, and paying off your mortgage early in a recent MoneyWeek magazine cover story – you can read it here: Pensions vs Isas: what’s the best way to save for retirement?
Don’t miss this great opportunity
And finally, just before I sign off, here’s a reminder that we’re holding a gathering of our top investment experts in London in June. We have also invited along other leading analysts, such as Dylan Grice from French bank Societe Generale.
There’s an impressive line-up of talks, presentations and analysis and it will be a chance to discuss the best ways to grow your wealth in the coming year. It’s on 18 May in the centre of London.
To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds – we’ve listed them below.
Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• Matthew Partridge
• David Stevenson
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