Three ways to cash in on the Fed-inspired ‘dash for trash’
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MoneyWeek Editor
John Stepek Jan 27, 2012
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Ben Bernanke has made it clear to the world that he will print as much money as it takes to blow up another bubble.
As one City pundit pointed out to me, adopting a 2% inflation target now means Bernanke has an excuse to ramp up the printing presses, even if there is no ‘emergency’. He just has to say that inflation looks like coming in below target.
That’s quite scary. When quantitative easing was introduced, it was an emergency policy to prevent economic Armageddon. Now it’s just another little lever on the central banking machine, to be tweaked when Ben feels the economy could do with growing just a little bit faster.
This is bad news in the long run – the current crisis was caused by overly loose monetary policy, after all.
But in the meantime, markets are back in risk-on mode. So how can you profit?
Profiting as markets return to ‘risk-on’ mode
We’ve been keen on defensive stocks and gold and cash for quite some time now. I’m still happy to hang on to big blue chips with decent dividends. But it’s becoming a very popular trade. So I’d hold on to what you’ve got, but before you decide to add a lot more, make sure the yield is chunky enough to be worth it.
Meanwhile, with the Fed promising to print up another bubble, now could be a good time to put some of that cash you’ve been hanging onto into some of the more attractive risk assets out there.
But before you run off and tell your broker to stuff your portfolio full of RBS shares – don’t. If you want to profit from a Fed-inspired ‘dash for trash’ then the sensible way to do it is to buy risky assets that have a decent fundamental story too.
In other words, you’re not buying ‘trash’ at all. You’re buying ‘risk-on’ assets that you’d like to buy anyway, so that even if the Fed sugar rush wears off, you’re not left holding some dodgy financial stock that you wouldn’t otherwise have touched.
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India is the most attractive Bric
So what looks worth buying? Looking at emerging markets first: of all the Bric (Brazil, Russia, India, China) economies, I like India best. Why?
Despite China loosening monetary policy, I think the country is heading for a harder landing than most people expect (as I wrote in last week’s issue of MoneyWeek magazine: Brace yourself: China is heading for a hard landing). The property market is in trouble, and we all know that when a property bubble bursts, it’s messy for the economy. Maybe China has discovered a way to short-circuit that process, but I wouldn’t want to bet on it.
As for Russia, forget all the arguments about corruption and the power of the Kremlin: the real problem for your average retail investor’s purposes is that it’s simply a play on the oil price. And the outlook for oil is far too vulnerable to disappointment for me to want to bet on Russia.
Brazil has a lot going for it: it’s resource-wealthy, with healthy demographics. But its consumers are over-stretched and if China does have a hard landing, Brazil’s dependence on commodities will hurt it.
What’s India got going for it that the others don’t? My colleague Cris Sholto Heaton ran through all of India’s problems in a MoneyWeek cover story a couple of weeks ago: Investors should look forward to an Indian summer. It’s corrupt. Its politicians can’t get their act together. The infrastructure is appalling.
But India does have some advantages. It’s one of the few emerging markets that would see lower commodity prices as outright good news. Its politicians may be rubbish, but there isn’t the same concern about outright revolution that might lurk at the back of your mind if you buy into Russia or China.
And sentiment towards it has been awful. While you can find plenty of people willing to state the bull case for Brazil or China, even fans of India have been lukewarm on the investment outlook. This isn’t just being contrarian for the sake of it. When risk appetite turns, it’s the investments that people have despised that benefit the most.
India’s market has already climbed 7% since we published that cover story. One way to buy in is via the Aberdeen New India investment trust (LSE: NII).
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Precious metals look good
Secondly, precious metals: you no doubt own gold, and it has shot up on the back of the Fed’s announcement. But if you don’t have exposure to junior gold miners, now could well be a good time to buy. If risk appetite remains strong, then these are the kind of ‘punting’ stocks that will benefit.
The US-listed Market Vectors Junior Gold mining exchange-traded fund (NYSE: GDXJ) is probably the easiest way to get in. It’s risky and volatile, but it’s still a lot safer than sticking your money into an individual gold mining stock.
Thirdly, and also in the precious metals area, if you’re feeling bold, you might want to look at silver. Or if you’re feeling a little less bold, platinum is unusually cheap compared to gold at the moment. We look at the reasons behind this, and the best ways to get exposure in the latest issue of MoneyWeek – subscribers can read the piece here: How to play the price of platinum (if you would like to become a subscriber, you can claim your first three issues free here).
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