John Stepek highlights some of the best bits from our free emails, newsletters, blog and MoneyWeek magazine that we’ve published in the past week.
● So here we are in 2011. The outlook is uncertain, to say the least. With the Federal Reserve determined to keep the markets afloat by printing money, it may even be a decent year for stocks.
But on the other hand, there are a lot of risks out there. My colleague Merryn Somerset Webb listed 14 of them on her blog this week. If you have any worries to add to the list, please do tell on the comments section below her piece.
Our biggest worry right now is inflation. This week I looked at why China’s inflation problem might become our inflation problem and also why Germany’s economic recovery – and ensuing inflation risks – might be the biggest threat facing the eurozone.
The problem with higher inflation of course, is that it would usually lead to higher interest rates. That’s one thing that very few people are expecting this year. Deflationists believe that interest rates simply won’t go up because they won’t have to. Inflationists believe that central banks won’t put up rates, because they’ll be too scared about derailing the recovery.
What if that’s the big surprise for this year?
● No doubt we’ll find out soon enough. But in the current issue of MoneyWeek magazine, Simon Caufield – who writes the True Value newsletter – looks at how to protect yourself and even profit when interest rates start to rise. You might be surprised by his top tip – but it makes perfect sense once you read his rationale. And better yet, it’s an unloved investment too. Subscribers to MoneyWeek can read the story here. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
● Certainly, the ‘fear’ side of the equation seemed to be winning out by the end of this week, the first week of trading. US employment data was disappointing, and on Thursday, everyone suddenly seemed to remember that the eurozone was still bust – Santa hadn’t delivered a big sack of solvency to the periphery countries, regardless of how good they’d been.
But to balance the gloom out a bit, Merryn also came up with six reasons why 2011 might be nothing to worry about. From rampant liquidity to general momentum, markets might just have a very pleasant year. One commenter, ‘Dan’, posted a seventh, which I rather like:
“7. Technology. I work in the UK’s high tech manufacturing sector, designing lasers for DNA sequencing. In the 13 years since I started my PhD I have seen a big change in the ability of the scientific community to share information solely because of the internet. The internet also allows us to find specialised commercial suppliers all over the world. We have improved many of our products simply by sourcing better and (often) cheaper components.
“The same effect seems to be happening to all areas of technology, quality is improving and cost is falling. It is not really an investment opportunity but whatever money we all have will give us a better quality of life.”
I’ll freely admit that while I tend to be sceptical about our efforts to manage our financial system, I’m a lot more optimistic about the ability of technological advances to solve at least some of our problems. Give us your views on why the future is bright (at least for 2011) 2011 might be nothing to worry about.
● On the companies side, one of the big stories has been social networking site Facebook’s $50bn valuation, after Goldman Sachs bought a small chunk of the company for $450m. As Merryn noted on her blog this week, we don’t get it.
There are a couple of things that stop us from being out-and-out dismissive of the whole thing – one is the memory of our scepticism about Google when it first listed. Another is that “Facebook now owns and has access to an astonishing amount of our personal data. Let’s not forget it has well over half a billion users and rising. I can’t yet see a way for them to use that profitably, legally and ethically all at the same time. But if someone else can, and if (this is a big if) Facebook stays popular with its users, $50bn might one day look like small change.”
As Merryn says, it’s a big if. But we’ll be watching the story with interest.
● One area we’re wary of this year is emerging markets. For a start, lots of funds are being launched in that general area, and there’s a general consensus that you should be “investing where the growth is”, even although economic growth has no particular correlation to stock market growth.
But that, of course, doesn’t mean there are no good investments to be found. Particularly not in such a vast region. You just have to do a bit more legwork than simply snapping up the first fund you see with an ’emerging’ label on it.
Our Asia expert, Cris Sholto Heaton, has some strong ideas on where emerging market investors should be focusing right now – small caps. That sounds risky, but in many ways, small caps are actually a far more solid bet than their larger rivals over the long term. Cris explained why, and tipped five funds that will give you access to the theme, in his free MoneyWeek Asia email earlier this week.
Says Cris: “Even in the developed world, smaller companies have historically outperformed larger ones. They fall more when times are bad, but rise more when times are good. And over a long enough period, the good has outweighed the bad.
“The question of why small caps produce better long-term returns is an awkward one for many market theorists. Those who hold most strongly that the market is highly efficient maintain that this is related to the greater risks that small caps carry. According to modern financial theory, investors taking more risk are supposed to be offered greater potential rewards as an incentive to do so.
“Now, there’s no doubt that smaller stocks overall are more risky than larger ones – although you can’t lump them all into the same bracket. A small but established, profitable company in a defensive line of business is certainly less risky than a similarly-sized speculative oil explorer or a tech start-up.
“But in any case, it’s not just about the risk/reward trade-off. Instead, the gap between the two has a lot to do with market inefficiency. Smaller stocks tend to be much less widely researched than larger ones.”
If you’re looking for an attractive investment theme for the next five years rather than the next five minutes, I’d highly recommend you read his whole piece here: Five small-cap funds for your portfolio.
● Another man who likes to point out the merits of small caps is Tom Bulford. In his free Penny Sleuth email this week, he pointed out to readers that while the FTSE 100 gained 14% in 2010, and the All-Share did 15%, the Aim index managed “a gain of 40%!” No fewer than 137 Aim-listed stocks “saw their share prices at least double last year. 37 delivered returns of 300% or more. 15 made over 500%.”
You can read all about them here: The small-cap sectors to watch in 2011. And Tom reckons 2011 “will be another great year for penny stocks. Several industries are on the cusp of potentially explosive developments – from biotech to energy and mining.”
● Oh, and just before I go, a quick reminder – John Burford’s free MoneyWeek Trader email has now launched. John’s a trader who’s been writing a blog for us about how to spread bet successfully. Even if you’re not keen to take the risks that spread betting involves (which is perfectly understandable), his email is of use to anyone who’s interested in investing. In a few short months, John has already discussed how to improve your trading by using personality profiling tools, and explained why investor sentiment is one of the most important indicators available. I heartily recommend it – you can sign up here for free.
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Have a great weekend!
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