This week, investors’ attention returned to the eurozone’s woes. And Spain’s recent credit rating cut – to the same levels as Italy – has become the focus point, says John Stepek in Money Morning.
Some might wonder why Spain is in so much trouble, says John, as its public debt-to-GDP figure is lower than other countries in Europe.
“But if you’re confused, it’s only because you’re looking in the wrong place. Spain’s problem lies in its private sector lending. In terms of its problems, you can think of Spain as being a big version of Ireland. Easy credit drove a massive bubble in the property market. That bubble has burst.”
To be fair to the Spanish government, it hasn’t been sitting on its hands. It has rescued smaller lenders, forced consolidations and made sure banks can cover losses to any property developers. The trouble is, there are almost no provisions for all the other losses on bank balance sheets.
In particular the €600bn mortgage market looks like it could get nasty, says John. The Bank of Spain says less than 3% of mortgages are in trouble. But “given that, as a whole, dud loans are at their highest level since 1994, it seems particularly unlikely that the mortgage sector has escaped unscathed”.
If things get even worse, yet more mortgages are likely to fail. That would be bad news for a Spanish economy that is enduring its second recession in three years. In fact, “the likely end result of all this is that Spain needs some sort of bail-out”.
What Spain’s woes mean for investors
Spain’s stock market has been taking a pounding – it’s down almost 20% in 2012. So you might expect a few opportunities to be arising. Maybe not yet, says John.
“As for bargain stocks in Spain – we’ve been keeping an eye out, but there’s nothing that catches our eye as being quite tempting enough to be worth the risk, given the state of the economy. We’ll let you know when and if that changes”.
Spain’s woes would also bad for the euro. “In the long run, the euro can’t survive”, says John. “There are too many countries, with too many different needs. But it may take a larger, more self-confident nation, declaring that it’s had enough of the currency and can go its own way. If you’re interested in playing the currency markets, you should sign up for our free email on spreadbetting, MoneyWeek Trader. That’ll give you an idea of the risks involved and how to minimise them”.
This unloved sector looks good
Since taking the reins as investment director at the Fleet Street Letter, David Stevenson has been on the hunt for value stocks. These are shares that are trading far cheaper than their true worth. Last Friday David investigated the ‘unloved’ pharmaceutical sector.
“Over the last decade, big pharma shares have fallen right out of favour. In fact, they’ve been savagely de-rated. Why? The main worry for investors has been the so-called ‘patent cliff’. Many blockbuster drugs either have lost, or will soon lose, their patent protection. These medicines can then be copied by ‘generic’ rivals and sold cheaper, so less profit will be made by the original manufacturers.”
So why is David still interested in the sector?
“Three reasons: first, the patent cliff has been a concern for ages. By now it’s well and truly baked into share prices of major drug makers. Second, while investors have shunned the sector, earnings have been growing steadily, as have dividends. This means the sector now contains both cheap stocks and well-above-average dividend yields. Third, large pharma firms have been planning for the patent cliff for years. And they’re taking action to offset potential damage to their sales.”
Big pharma is buying up promising smaller drug firms with great new products. It’s exploring new areas like vaccines. And it’s searching hard for new blockbuster medicines. The US Food & Drug Administration – the key global regulator – approved more than 30 new drugs in 2011 compared to 22 the year before.
“In short”, says David, “big pharma is much more prepared for the patent cliff than many realise. Add in those low valuations, and this could well be the right time for contrarian investors to move into this hugely disliked sector.”
An African gold miner to buy
Another investment sector that’s quite unloved at the moment is gold mining. Sure, the price of gold has been rising for years. But shares in firms that look for it and extract it have had a much harder time.
Yet Dominic Frisby has just highlighted one miner with a bright future. It’s based in Liberia, a country associated with civil war. But despite the violent past, Dominic believes it’s on the mend.
For starters the country now has better government. Current leader Ellen Johnson Sirleaf – Africa’s first female president – was awarded the Nobel Peace Prize.
“Sirleaf has managed to get nearly $5bn of national debt written off (it’s now close to zero), as well as raising $18bn in foreign investment. GDP now stands at just below $1bn, and has been rising steadily since 2003. Indeed, Liberia is now one of the fastest-growing economies in the world. The Economist Intelligence Unit expects GDP growth of 9% this year, and 7.5% next”.
“But Liberia’s main attraction for investors is that it is rich in natural resources. In September 2011, Arcelor Mittal’s iron ore mine went into production, making the country’s first shipment of iron ore in 20 years. BHP Billiton is also in the country, Malaysian conglomerate Sime Darby is there for palm oil, and Firestone for rubber”.
Dominic’s Liberian miner is well located and has a successful management team with a great track record.
Buying foreign shares
Another plus point for Dominic’s gold mining tip – it’s listed in London, which makes it easy for MoneyWeek readers to buy.
We‘re always recommending shares in overseas markets, though, that don’t have a London quote. And for some UK investors, the idea of buying stocks outside the UK is forbidding. It’s certainly not always simple.
But don’t worry, says my colleague Tim Bennett, because help is at hand. In this week’s video tutorial, Tim has been checking out the best ways to deal abroad.
And don’t be concerned if you missed any of Tim’s earlier videos – just scroll though the free archive on our website.
Make a packet from wind turbines
Closer to home Merryn Somerset Webb has been looking at the investment returns from wind turbines.
After doing the sums for a 500kw turbine – smaller than those on large wind farms but too big to stick up in a London garden – Merryn “began to see just why so many UK land owners – big and small – are so into renewable energy”. She reckons that if you can stump up the necessary £900,000, you could make £200,000 a year.
“But it gets better”, says Merryn. “Your income is inflation-linked. So as the real value of the debt falls, the real value of the payments you’ll get will stay the same. For 20 years. That means your take, in real terms, over the lifetime of your subsidy guarantee, is going on £4,500,000.”
Of course the most shocking thing about this, says Merryn, is that we’re all paying for it. “The subsidies that facilitate this huge transfer of wealth are paid via a charge on your utilities bill.” And this highlights a wider point about how wealth and resources are taxed and distributed in Britain.
“I’ve written here several times before about land taxes, but it seems to me that wind farms exemplify the point pretty well. Those on whose land they stand experience huge positive land value – they do nothing, but they make money. So why aren’t those gains subject to a land tax, or at the very least a windfall tax?”
“And what of those who have to look at their neighbour’s turbines (and new Range Rovers) from their front rooms? They are experiencing severe negative land value. Why aren’t they compensated? Doesn’t make much sense does it?”
And here’s what you think
As usual, the comments section soon filled up with rival views.
‘Big Bert’ says that “the subsidy which we are all forced to pay on our electricty bills and on those of British industry is a huge bone of contention. It raises the cost of energy bills and makes British goods less competitive on the open market. There are 5.5 million British people in fuel poverty. This subsidy should be scrapped.”
But ‘Phil Chapman’ reckons renewable energy may prove cheaper over the long term. “’Subsidies’ to renewables such as wind are a hedge against future price rises. By building a wind turbine now (or solar array) we are locking in today’s price for wind-generated electricity. Although that might currently be higher than from other sources, over 25 years it’s very possible that it will actually become lower.”
It’s an interesting debate, so if you haven’t had your say yet, the investment returns from wind turbines.
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