Before I start today, I’d like to draw your attention to MoneyWeek’s first ever documentary. It’s a bold new step for us, and something we’ve been working on for a few months. I must warn you though, it’s very hard-hitting – don’t expect an easy ride.
Is Berlusconi coming back?
As some of you may know, Italy is going to the polls this weekend. We don’t normally follow elections on the continent too closely but in these days of euro crisis, every election has the potential to disrupt the market. Italy is no exception.
The good news is my colleague, Matthew Partridge, reckons he’s found a way to profit from the Italian elections, as he explained on Thursday.
It all comes down to Silvio Berlusconi, says Matthew. “Less than four months ago, he was sentenced to a year in jail for tax fraud. And he still faces other criminal charges. Yet the polls still suggest that there’s an astonishingly good chance that the former prime minister will actually win next week’s election in Italy.”
Jokes about ‘bunga bunga’ parties aside this has some serious implications. “Everyone knows that Berlusconi isn’t that into either the European Union or into the austerity apparently required to keep it together. So, as his poll ratings are surging, so are Italian bond yields: they have hit levels not seen since the end of last year. That’s not a good thing.”
Other parties doing well in the polls are also anti-austerity notes Matthew. So, even “if Berlusconi himself doesn’t win, the next government isn’t going to be doing what Brussels wants it to.”
So what will happen next? “You might think the best thing would be for Italy to get on and leave the euro. A new lira would fall in value and that would cut real wages via imported inflation. Italy would be competitive, exports would rise, debt would fall. Job done.
“If only it were so easy. After all, were this simply a question of economics, the euro would be long dead. The more likely solution is another attempt to smooth over the cracks with more quantitative easing (QE) from Brussels.”
That will be good for European stock markets, says Matthew. He particularly likes the look of Italy’s main index, so if you’re interested, profit from the Italian elections.
Baton down the hatches against a bond market storm
QE is also having a massive effect on the bond market. For most private investors, bonds are hardly the most sexy asset class, but, thanks to our pension funds, its one that we’re nearly all invested in.
One of our expert commentators and regular roundtable attendees, James Ferguson, believes there’s a big storm brewing in the bond market and he covered why in this week’s magazine. Subscribers can read the story here (if you’re not a subscriber, subscribe to MoneyWeek magazine
A mansion tax solves nothing
On Tuesday, MoneyWeek’s editor-in-chief, Merryn Somerset Webb, returned to one of her favourite themes – the mansion tax.
Merryn can understand why voters and politicians are concerned about high house prices. They are “preventing people from starting their lives properly, constantly widening the gap between rich and poor, prompting huge welfare payouts in housing benefits and the like, and making us all commute for hours to get to work.”
The trouble is, says Merryn, that a mansion tax won’t solve any of this. After all, “the problem with our property market is not that people living in expensive houses are too rich and that this isn’t fair. It is that our property market is artificially supported by a host of government policies designed first to keep our banks’ bad debts on hold while they have a go at rebuilding their balance sheets, and second to allow every billionaire in the world to hedge their global bets by holding empty London properties for nothing but the cost of a cut-rate council tax.”
It’s not that Merryn is opposed to a property location tax per se. Indeed, she believes that, in isolation, it would be a good thing. But instead, “our idiot politicians want to put their mansion tax in on top of all our other wealth taxes (think capital gains tax, stamp duty and inheritance tax (IHT) for starters)”.
Merryn’s blog sparked a debate among readers. ‘Justin’ agreed with Merryn. “Put simply, artificially high house prices are strangling the UK economy. They are a result of our unbalanced, stagnant economy that is completely dependent on zombie banks, debt and consumerism.”
‘MichaelL’ had one interesting solution. “The best property tax would be a based on number of houses you own. With very high tax for BTL [buy to let] essentially, BTL investors would sell (a tax high enough would force them) – then that money would get reinvested into the stock market/other ‘productive’ investments.”
It was one of the most commented articles on the website. If you haven’t read it yet, click here and have your say.
How to play Central America’s growth story
Central America isn’t a place you hear about much. And when you do, it’s normally something involving drugs or guns. But in this week’s edition of our free emerging-markets email, The New World, I explained why investors should start paying closer attention to the region.
“Central America is made up of Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama and is home to around 41 million people. The largest is Guatemala with 14 million people, the smallest is Belize with just 300,000 people, while the rest have between three million and seven million people each.”
There are lots of differences between the member countries but there are also some key common traits that stand out for investors.
“The region has two main economic strengths, agriculture and light manufacturing. Thanks to its tropical climate, rich volcanic soil and abundant freshwater supplies, almost anything can and does grow in Central America. The area is a major exporter of coffee, bananas and tobacco. It’s also built up some impressive value-added industries.”
“Central America also has lots of light manufacturers. Largely focusing on textiles, cheap electronics and machine components, their plants can be found in tax-free export zones across the business-friendly region. These maquiladoras were first set up in Mexico to make goods for the US. However, as Mexico has moved up the manufacturing value chain, they have become more common in Central America.”
And, as I explain, those two sectors are about to receive a massive boost. An EU trade agreement, rising Chinese labour costs and favorable demographics are all going to help the Central American economies over the coming years.
To be honest, the really hard thing about Central America is finding a way to play it. Local stock markets are pretty underdeveloped and completely off-limits to British private investors. However, I’ve managed to find one way that you can benefit from the coming boom – investors should start paying closer attention to the region.
Don’t be tricked by the p/e ratio
As always, I’m also going to take this opportunity to point you in the direction of Tim Bennett’s latest video tutorial. This week, he looks at the p/e ratio. It’s one of our favourite methods of judging the value of a share but, as Tim explains, there are some major flaws you should be aware of.
A gold producer to bag now
Regular readers will know that Tom Bulford’s free Penny Sleuth email uncovers the type of small caps you just don’t hear about in the mainstream press. Tom was at it again this week with Caledonia Mining (AIM: CMCL), a tiny African gold producer.
“Caledonia has a mine that produced 45,000oz of gold last year”, says Tom. “The cost, $500 per ounce, compares very favourably with a local average of around $800/oz. Production is rising towards a target of 76,000oz by 2016, the $37m investment cost can be paid for out of cash flow, still leaving sufficient funds for Caledonia to pay a dividend and have a look at a copper project in Zambia.”
Despite this, broker Edison Investment reckons that the shares trade at a discount of around 50% to comparable gold miners. So what’s the problem?
Political risk is the answer. For companies that venture into these hot spots, the threat is not simply a knock on the door from a friendly government officer who’s come to seize your business assets. There is also an unhelpful business environment with expensive legal changes always a possibility.
For example, “in 2010, President Robert Mugabe created his ‘indigenisation’ law that required international mining companies to transfer 51% stakes to local investors. This replaced another hopeless arrangement that required all miners to sell their produce to the Central Bank, which then failed to pay for it. Unsurprisingly, the mining industry was brought to a standstill, but the new rules have prompted some revival of mining in a country that is rich in resources, especially gold and diamonds.”
Of course, Mugabe will not last forever and who knows what regime would follow him, muses Tom. “That could be messy. So, penny-share price or not, investors are likely to remain wary of this gold play.”
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• Matthew Partridge
• David Stevenson