Britain’s main stock market has risen in tandem with Team GB’s Olympic gold medal tally – it is up around 3.5% since the start of the games.
But don’t be fooled, says John Stepek in Thursday’s Money Morning.
“The UK economy won’t grow at all” in 2012, says John. “Just a year ago, the Bank of England’s prediction was for 2% growth. The recovery has been somewhere between pitiful and non-existent”.
Inflation could start to rise again. And that would be terrible for the UK economy.
“Part of the big problem for the UK has been that wage growth has been below inflation. In real terms, consumers are getting no interest on their savings, and their cost of living is rising. Meanwhile, they can’t get hold of as much credit as they used to. So, given that Britain is a consumer-driven economy, it’s little wonder that we’re struggling.”
John thinks that, secretly, the Bank wants to push inflation much higher.
“Britain is heavily indebted. That’s what is weighing down the balance sheets of banks, consumers and the government. Writing off the debt is one way to get rid of it, but it’s potentially very traumatic”.
“A less painful, but long and drawn out way of getting rid of the debt, is to inflate it away, while keeping interest rates low. Sticking to the 2% inflation target isn’t the way to go about that; you want inflation to be at least a little bit higher than that”.
Of course, the Bank doesn’t want to admit this, says John. That’s because a widespread belief in inflation is a self-fulfilling prophecy. If people think prices will rise, they will rise. So the Bank of England is walking a “tightrope” and trying to keep inflation above its 2% target, while all the time talking it down.
The problem for Britain is that this combination of low growth and inflation equals stagnation, says John. So you should have “a core section of your portfolio that pays a decent income that you can reinvest in other opportunities as they arise”.
To that end, my MoneyWeek colleague Phil Oakley recently explained how to build the ideal income portfolio.
Look east for profits
Many of the world’s fastest-growing economies are found in Southeast Asia and MoneyWeek’s Asia expert, Lars Henriksson, has uncovered one of the region’s best investment stories.
“The Mekong river courses through the very heart of Southeast Asia”, says Lars. “It starts in Tibet and snakes its way through many of the fastest developing economies on the planet – Myanmar, Laos, Thailand, Cambodia and Vietnam. Through fishing, aquaculture and irrigation, it sustains 65 million people.”
So far the “Greater Mekong region” has taken a backseat as other parts of Southeast Asia have developed, but Lars thinks that’s all about to change.
“This region is benefiting hugely from the introduction of the Asean free trade agreement. This trade agreement will bring about the most exciting investment story of the decade.”
Another factor in the Greater Mekong story is geopolitics. “The Americans recognise an economic miracle when they see one. But they also recognise the strategic importance of these countries. Strategically located between the two emerging economic giants, China and India, Asean is regarded as a key ally for the US. The US has declared it will seriously increase its military presence in Asia over the next few years.”
And, says Lars, as we saw when Eastern Europe opened its doors to the West, American military bases are normally backed up with “serious foreign direct investment”.
Most of the spending is likely to be on infrastructure, says Lars. “Infrastructure investments worth $10bn have either been completed or are being completed. Among these are the upgrading of the Phnom Penh to Ho Chi Minh City highway (Cambodia to Vietnam) and the east-west economic corridor that will eventually extend from the Andaman Sea to Da Nang”.
But that’s just the start. “Over the next decade, Asean nations will require approximately $60bn a year to fully address the region’s infrastructure needs… That could spell enormous gains for investors in everything from material stocks, construction groups to the banks, commercial property and logistic groups that are forging new trade links between these nations.”
The ambitious spending plans and exciting growth prospects certainly make a stark contrast to conditions in more mature economies. Lars has found a specific way to play the Mekong story, so click here to read the piece in full: Your gateway to the Mekong boom.
Banking’s technology revolution
Back in Britain, Tom Bulford, author of the Penny Sleuth newsletter, is feeling cheesed off by the banks: Get ready for a payments revolution.
“Each time I enter my local branch, it’s as if I am walking in there for the first time”, says Tom. Given that he’s been with the bank for 40 years, you can understand his annoyance.
“Human contact is perfunctory, and little more than a prelude to an attempt to sell me some new product. The telephone is no better. I have now risen to the ranks of ‘Premier’ status with this bank, but I fail to see how this confers any advantage.”
However, Tom’s bank has managed to do something right. It recently offered him a groundbreaking new product. It is a small sticker that can fit on the back of a phone and allow the account holder to make payments of up to £15 just by “wafting my phone over a terminal”.
But banks won’t be the only ones to benefit, says Tom.
“Payment relies upon a means of exchange – coins, for example, or a cheque – and a secure environment in which transactions can be processed. This is why the giants of the digital world have their eyes on payments.”
“A payment instruction can be formed into digital code and sent over a network secured both by physical means, and by clever software and personal passwords. Starbucks and Google have both been authorised by the Financial Services Authority to transfer money through smartcards and other electronic means. Mobile operators want a slice of the action too. In Canada, mobile network operator Rogers Wireless has applied to become a bank.”
In short, we’re on the cusp of a “revolution”, says Tom. Watch this space, as it’s an area he’ll be following closely in future newsletters.
Don’t trust fund managers
Of course, banks aren’t the only part of the financial industry that shows scant regard for its customers, says Tom. Fund managers treat their clients just as badly. Indeed, Tom thinks most investors would be better off managing their own money – watch this video to see why.
Do we need a gold standard?
If you are managing your own money, it’s helpful to get to grips with some financial basics. You don’t have to be an ‘expert’. After all, we have seen how badly most of them have fared in the last five years. But a good understanding of the fundamentals is essential if you’re investing. And one of the best tools for learning about finance is Tim Bennett’s video tutorials. This week Tim looks at the gold standard. He explains how it works, why the last one was abandoned and asks if we should bring it back today.
A vital ratio for share investors
Gold is also pretty important for David Stevenson, investment director at The Fleet Street Letter. He uses one measure in particular to judge when to buy and sell stocks – the gold to silver ratio. This shows how many ounces of silver you can buy with one ounce of gold.
“The lower the ratio falls, the higher is the widespread buying of – and speculation in – silver compared with gold.”
But the measure can also tell us about share prices, says David. That’s because “major moves in the gold/silver ratio can also indicate heavy punting in other higher risk investments, like equities. Put another way, excessive levels in the ratio often coincide with overall turning points in share prices. Over the last five years in particular, the ratio has become a very handy guide to where global stock markets are heading next”.
David proves his point by comparing the ratio with recent stock market peaks and troughs. Look at the chart below.
“Just before the financial crisis hit in earnest, in late-2008 the gold/silver ratio climbed to 85. That preceded the March 2009 stock market lows by around six months. Then in the early months of last year, the ratio plunged to 32. That forecast the 2011 peak: in the second half of the year the S&P 500 index had a rough time.”
So what’s the ratio telling us now? It’s not good news I’m afraid. “In 2012 the S&P 500 has been in rally mode for most of the time. But the gold/silver ratio is telling a very different story. It’s in the middle of its ten-year range. What’s more, it’s dropping steadily.”
Fortunately David has a strategy to make money despite the ominous signs from the gold/silver ratio. In fact, he’s come up with a way to get twice as much dividend income as everyone else – even if you buy the same shares. I’ll leave it to David to explain.
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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