MoneyWeek Roundup: four big lies you will be told this year
James McKeigue Jan 12, 2013
So far 2013 is turning out to be a good one for the markets. The FTSE has broken through the 6,000 barrier that restrained it for most of 2012.
One area that seems to have cheered investors is China. Last year, growth began to slow, and even the most optimistic China bulls had to concede that something bad was happening. But a recent slew of positive news has investors, especially in the commodity-heavy FTSE100, feeling happier.
Following a recent trip to China, Penny Sleuth author, Tom Bulford, was distinctly bullish about China’s prospects.
“It is five years since I was last in Hong Kong and what struck me most forcibly over Christmas is the sheer prosperity of the place, the result of relentless economic expansion that shows no signs of slowing. Blink and you miss another World Business Centre soaring into the polluted sky. Turn your back and another suspension bridge has joined a once tranquil island to the maelstrom, or another marbled shopping mall has opened its doors.”
Of course, concedes Tom, it’s hardly news that Hong Kong is wealthy and booming. But what was more telling was his trip to Panyu, a ‘town’ of 2 million people on the Chinese mainland just a few hours' drive from Hong Kong.
“Panyu’s newfound prosperity is evident. Huge gleaming tower blocks crowd the landscape, the shops are smart and inviting, the people are fashionable, and the bicycles of yesteryear have been replaced by Mercedes and Minis. Mobile phones are in constant use, iPads are ubiquitous. Apple and Samsung are rulers. If Hong Kong is to China what Hollywood is to the USA, Panyu is doing its best to close the gap with the former.”
Tom readily admits that China has plenty of problems. Bad air quality, dangerous roads, poor building standards and low wages are all problems that he acknowledges. Nonetheless he thinks those that write off China are missing the point.
“I see nothing that can derail this mighty economic engine. Just as they have done for years in Hong Kong, the Chinese on the mainland are hustling their way to the land of luxury.”
If you’d like hear more insight from Tom you can sign up to the free, twice-weekly Penny Sleuth.
Another investment trend that Tom is excited about is oil, specifically an exciting new oil province that could double world reserves. He’s written a special report explaining how this could redraw the world energy map, and highlighting how to profit.
Are child benefit changes actually a cunning tax ruse?
On her blog, Merryn wondered whether child benefit changes might be a way for the government to crack down on tax dodging.
Merryn notes the clamour of complaints about the extra people who will have to fill in tax self-assessment forms as a result of the change. According the Institute for Fiscal Studies (IFS) around 500,000 families will have to file self-assessments.
“I can’t see how that many people can be getting away with not filling in a self-assessment form in the first place”, says Merryn. “You have to fill in a self-assessment form by law if you are self employed, if you earn over £100,000, if you are a company director, or if you are a Lloyd’s name or member.”
Given those requirements, says Merryn, “It seems amazing, surely, that there could be 500,000 people in the UK with earnings between £50,000 and £100,000 earning not one penny in non-PAYE income.”
Indeed, she suspects “there are a huge number of people in the UK who are higher-rate tax payers but who, intentionally or not, are evading higher-rate tax on their non-PAYE income by not declaring it on a self assessment form.”
Now, thanks to the latest changes, these people have to either give up their benefit completely, or declare their other income via self assessment. That means the changes, which have generally been seen as a shambolic disaster, are actually “devilishly clever”.
Readers were quick to chime in with their own views.
‘dr ray’ thinks that Merryn could be on to something. “There seems to be no logical reason to voluntarily opt out of child benefit except to avoid filling a tax return. Presumably the folk who currently should but don't fill a tax return will opt out and ones who fill a form anyway will opt for the interest free loan that child benefit has now become.”
Meanwhile Ellen wonders if other motives are at work, noting that some believe “the conspiracy behind the withdrawal of child benefit was to breed an intolerance by higher earners towards the entire welfare system as they are not allowed to access any part of it.”
If you haven’t entered the debate yet, click here to have your say.
Also, we look at the child benefit changes in more depth in the latest edition of MoneyWeek. If you’re not a subscriber you can get your first three copies free here.
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Take a bet on Big Pharma
In Wednesday’s Money Morning, John Stepek revisited the pharmaceutical industry.
“2012 was a poor year for Big Pharma. In a market that made surprisingly decent returns, given the jitters in the global economy, the shares of drug makers were among the weakest performers.”
So why did the large pharmaceutical firms do badly? One reason is worries about healthcare cuts in the indebted developed world, says John. Another is that other ‘sexy’ investments, such as biotech, grabbed a lot of media attention.
But the real reason is that many investors are still worried about the problems that big drug makers have been battling in the last ten years, says John.
“There’s the ‘patent cliff’. That’s when branded drugs lose their patent protection. This means generic rivals can compete. Generics are far cheaper, so as soon as a drug goes off-patent, revenues are almost guaranteed to collapse. There’s also the fact that fewer new drugs have been getting through the regulatory process. In terms of drug treatments, all the ‘low-hanging fruit’ has been picked, was a common refrain of pharma executives in recent years. And then there’s the threat of slowing spending growth in developed countries, desperate to get to grips with soaring healthcare costs.”
No doubt there are a lot of big challenges, admits John, but what the market seems to have missed is that the companies are dealing with them.
Take the patent cliff. “European pharmaceutical companies, according to Deutsche Bank, have a launch pipeline over the next two years that could potentially generate $64bn in peak sales”, says John, that will outweigh the loss of £27billion of revenue because of patent expiries.”
Even the regulators are softening up. “Last year, the US Food and Drug Administration (FDA) approved 39 new drugs. Both 2011 and 2012 saw the highest levels of drug approvals in the US since at least 2004. So concerns that we’ve run out of new treatments that can make it to the market also seem to have been somewhat exaggerated.”
The other appeal of Big Pharma is that, thanks to emerging markets, it has quite exciting growth prospects, says John. “Global drug spending is expected to grow from around $956bn in 2011, to around $1.2 trillion by 2016. By that point, emerging markets will account for around a third of all drug sales, from about a fifth now.”
John gives his favourite tips in the sector so make sure to read the piece in full if you haven’t already.
Why it’s time to sell banks
In this week’s video tutorial, Tim Bennett looks at how the latest twist in the battle between banks and regulators could affect you. Regulators have just eased a key liquidity test for banks. In the short term, that plays into their hands and has boosted share prices. But in the longer-term, Tim is convinced the move is a massive sell signal.
If you like Tim’s videos – and it seems plenty of you do as his YouTube views head for the 1.5 million mark - you’ll want to sign up to his new FREE email, MoneyWeek Tutorials. It’s a great way to get key investment topics broken down into jargon-free bite sized chunks.
The four big lies you will be told in 2013
Before I go, I’d just like to point you in the direction of one of my favourite articles from the MoneyWeek website this week. In the Wednesday edition of his Right Side email, Bengt Saelensminde took on “the rulers of the universe”.
Who was he talking about? Politicians of course.
We live, says Bengt, in a world “where central bankers are puppets of the politicians and run policies that are now looking ever more like those you would see in a banana republic.”
Of course central bankers and politicians can’t be honest about this, says Bengt. Indeed there are four lies in particular that investors should watch out for.
“The first lie you'll hear this year from central bankers is that they intend to reverse their accommodative measures. For example, they will say that they intend to stop minting cash to buy government debt. Moreover (and more blatantly), they will announce their intention to start selling back to the market government bonds they've already bought. That's impossible at this stage of the crisis... but a lie the markets need to be told nonetheless.
“The second lie is that these asset purchases will be small and limited in scope. But from day one, the size and scope (ie, the type of debt they're buying) has ballooned. Actions that seemed unimaginable just a few years ago are now the norm. Market players have been hypnotized into thinking this is all very normal.
“The third lie is that there's a considered time scale to all of this. In fact, it was a release from the Fed that suggested the reversal is coming sooner than many think that sent the precious metals into a spin just after Christmas. Of course, there is no exit strategy and no timeline here. These guys are making up policy on the hoof. And to my mind it's only going one way – and that is more of the same and for as long as they can get away with it.
“The fourth lie they'll tell is that they're fighting deflation. But if that were really true, how can they also say that QE will be reversed? That would surely be to welcome deflation down the line.”
It’s strong stuff and Bengt explains what you should be doing to counter political deceit on this scale. It’s definitely worth a read,
• This article is taken from the free investment email Money Morning.
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