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The first I knew of it was on my way back from picking up the kids on Wednesday. That’s when my phone started making some funny noises...
When I checked, I found that gold and silver were going through the roof. US stocks, too.
In fact, the market’s been on fire lately. The FTSE’s almost back to 5,800. In the States, the Dow has been flying too.
What is going on? Well, frankly nothing at all! It was all down to probably the biggest non-event of the year.
But that doesn’t matter. What’s important is that there could be more big moves higher to come. And in today’s Right Side, I’ll show you where I think the best opportunity is.
The Fed lights a fire under the markets
What caused markets to erupt was the US Federal Reserve announcing it's keeping rates on hold. They’ll stay low until at least 2014.
And it seems to have done the trick. Stocks and commodities have lurched higher as investors pile into any investment with a pulse. For now at least, it seems everyone’s happy with Wednesday’s Fed announcement.
But what’s new? Crikey, if the markets didn’t already know the Fed’s plans, then frankly it’s no wonder there are still some wonderful opportunities out there!
But the point is that confirmation of what we already knew is great news nonetheless. And so here at The Right Side, it means we’re sticking to our knitting.
I’ll tell you where I’m looking right now.
Stocks and commodities have already raced away on the Fed’s news. And long may that continue. I could do with my stock portfolio gaining new impetus.
But I think there’s a more interesting market right now. So far, the corporate bond market is a little slower to react. But I reckon it’s set up for a great run. And the good news is that you’ve still got time to join in the party.
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Why corporate bonds are set to benefit
Here at The Right Side we’re very confident about the economy. We’re confident that it’s going to struggle, that is. For over a year we’ve been calling for a ‘double-dip recession’. And data out this week confirms that growth did indeed fall into negative territory again towards the end of last year.
It’s kind of obvious that when worldwide government stimulus falls by the wayside then money’s going to be sapped out of the economy. Over-leveraged banks were always going to struggle, adding a dangerous, vicious-cycle of money seepage.
Anyway, now the rest of the world is catching up to our way of seeing things. And it means low interest rates as far as the eye can see.
And that’s exactly why I fancy the bond market above stocks. What you’ve got with bonds is the promise of a juicy interest rate that was set way before the credit crunch.
And yes, government bonds have done extremely well. At least, the governments that are considered solvent have done well. Prices have gone up and that pushes yields down. If you want 2% interest on a ten-year loan to the government, then go for it, buy a government bond today... you won’t be alone.
But what I’m far more interested in are corporate bonds. I’m looking at bonds that were originally sold to investors with an interest rate of six or seven percent. That was well before the credit crunch happened.
Generally speaking, falling interest rates mean that the value of your bonds go up (as they have with gilts). That’s because these wonderful fixed coupons (interest payments) can’t be negotiated downwards. Your promise of 6-7% fixed for many years into the future looks great.
But here’s the thing: the prices of many of the bonds I’m looking at haven’t gone up at all – in fact they’ve gone down!
That’s because this is a market that’s focusing its attention on all the bad news. That is, the rotten economy that’s keeping rates down in the first place. And fair enough. A tough economy is going to put pressure on many businesses – and it’s true that many companies are going to struggle to keep up debt repayments.
But if you’re careful, that needn’t concern you too much. I’ve already mentioned a couple of bonds that I think are worthwhile considering for your portfolio.
In the case of my favourite pub landlord, bondholders have the security of a mortgage over 500 of their pubs. And in the case of Legal & General, you’re dealing with one of the UK’s oldest and best-respected insurance groups. But there’s more. Much more...
Let’s see what happens when the news sinks in
The bond market really isn’t full of risk-takers. Frankly most of the risk-seekers are let loose in the stock market. And on occasion that can be a good thing. As economies expand and do well, business owners (shareholders) are set up to profit. That’s why I have 25% of my assets in equities.
BUT as the economy stalls and contracts, then (in my opinion) you’re far better off being a creditor to those businesses. That is, you want to hold their bonds, not their equity. We don’t want to be the poor relation that comes begging for his dividend handout. We want to be the banker to these businesses demanding our interest coupons.
That’s especially the case when you can get in on great terms. What I mean by great terms is a decent interest rate and some decent security.
I’ve been banging on about bonds for some time now. And I expect more and more investors to come round to my way of thinking.
The Fed has laid down the marker. It's revised down its view on economic growth, and said savers aren’t getting a hike in interest rates.
Sure, this is hardly news to us here at The Right Side. But let’s allow the markets a little time to catch up. And as they do, expect more investors to join us in one of my favourite markets.
Keep reading The Right Side. I’ve got two great opportunities lined up for you.
First, next week I’ll tell you about another unloved bond that’s got the potential to give you a very handy income all the way through these troubled times. Make sure you read about that one on Monday.
AND I’ve got my eye on a stock that I think has the potential to fly. It’s a play on Africa – we’re talking about two of my favourite investment themes. Agriculture and oil. What’s more, you’ve got a chance to pick this stock up cheaper than the City grandees that have recently bought in. I’ve some more research to do on it. But I’ll let you know if it’s a goer.
Don’t miss next week’s issues. The Fed can’t make its intentions any clearer. And where the Fed leads, expect other central banks to follow. No interest rate hikes leads to rising asset prices. Be ready to take advantage!
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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Bengt Saelensminde
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