MoneyWeek roundup: How to invest in 'Deficit Britain'
James McKeigue Aug 25, 2012
This week brought an unpleasant surprise for Britain’s chancellor, George Osborne. The latest figures show that public finances fell off a cliff in July. Public sector borrowing is around £9bn more than it was at this point last year. And the government added to its debt in July when economists expected it to record a £2bn surplus.
So in Wednesday’s Money Morning, Phil Oakley investigated how bad the situation really is and what investors can do to protect their wealth.
The nub of the problems, says Phil, is that “the government’s deficit reduction plan has relied on one key thing: the economy growing”. A growing economy means growing tax receipts, which will help cut the deficit.
The trouble is, “a lot of GDP in the boom years relied on excess credit. With that credit now taken away, plus the burden of debt to pay off, how exactly is the economy going to grow as fast as the OBR thinks it will?”
The short answer is that it won’t, says Phil.
“The latest numbers are very worrying. Corporation tax receipts fell by 20%, mainly due to a very weak oil and gas sector. This doesn’t look like improving any time soon. Expect the next couple of quarters’ corporation tax receipts to be weak too.”
The other part of the deficit solution is to cut spending, but this isn’t happening either says Phil. “Not only this, but the government simply isn’t tackling the bloated size of the state. Government spending is growing, and is expected to be higher in four years’ time than it is today.”
All of this suggests that government finances could get worse, not better. And judging from recent history, if things do get worse, we are likely to see more money printing. That will push down the value of sterling, says Phil, which means “it makes sense to own assets in another currency that can appreciate against the pound”.
One of Phil’s preferred options is the Norwegian krone. Click here to read the piece in full.
The next investment craze - eggs
A rather more bizarre investment opportunity comes from Penny Sleuth and Red Hot Penny Shares writer, Tom Bulford. Believe it or not, he’s found a way to make money from eggs.
“If you took all the eggs that are thrown away in the United States each year you could make a very large omelette. In fact, it would be the size of Manhattan!” OK, it might seem a pretty pointless fact, says Tom, but it shows the size of the market.
The reason for the waste is that when a shopper finds a cracked egg in a carton, US supermarkets tend to throw the whole box away, says Tom. “This is a shocking waste of good nutrition. And I dare say that the same thing happens in this country and elsewhere.”
And in an increasingly resource-starved world you also have to think about what is used to get eggs onto supermarket shelves. The five billion eggs that are thrown away each year “required ten billion gallons of water… [and] 29 million gallons of gasoline”.
It seems crazy that this waste is allowed but there are some strong reasons why it works like this.
“The first reason is this. If an egg is broken, the supermarket does not have a substitutes’ bench of replacement eggs of the same, size, grade and age to pop into the empty slot.”
This causes all sorts of problems because it means the shop can’t guarantee all eggs have the same freshness. Meanwhile it’s clearly too difficult to create separate labels, barcodes and prices for boxes with missing eggs.
Another, more serious problem, is salmonella. “If there is an outbreak of this illness, the first step is to trace the eggs back to the farm from which they came. But if the box contained eleven eggs from one farm and one egg from another farm, the traceability problem would become twice as challenging.”
But there is a solution. A small British firm has a laser-printing technique, which is completely organic, uses no chemicals or ink and can safely mark each egg. This means a ready, identical replacement can be found for broken eggs. Unsurprisingly, the food industry is very interested in this technology, and it’s expected to be a growth market.
In many ways the firm is a typical ‘Tom Bulford tip’. He likes small, agile companies in growth industries because he believes if you get it right, you stand to make a lot of money very quickly. He’s just written his latest report on how to pick small companies – click here to read more.
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Gold medal for spending
Merryn has courted controversy by questioning the Olympics.
“Last week, I clearly committed a kind of blasphemy”, says Merryn. “In my editor’s letter I wondered if the £9-15bn the event cost the UK taxpayer wasn’t just a little bit too much. Don’t think about it now, I said – it might be a bit early – instead, wait until the next budget when you can’t remember who won the diving and your taxes go up again.”
The letter attracted a barrage of complaint emails and letters – the general gist being that the successful Olympics had a qualitative value that couldn’t be measured in pounds or pence.
So Merryn laid out her defence. “I would say that I didn’t mean to suggest that the Olympics weren’t fun and that they didn’t offer fantastic moments and bring much of London together with rather more community spirit than usual. Of course they did. They were also a nice showcase for our capital city in that, in the end, there were no terrorist attacks and no tube-related disasters. There may even be a legacy in some regeneration and a renewed interest in non-sofa related activities in the UK. That’s all nice.
“But enjoying something doesn’t mean that you get to completely suspend your critical faculties. Just because the Olympics were good doesn’t mean that they came in within budget (they were at least four times over the original budget which was a mere £2bn).”
Unsurprisingly the comment box below the blog filled up pretty quickly.
‘Aaron James’ supported the Olympics. “I think there's a lot to like about the Olympics and some of the expense is worth it. Certainly it provided Britain with a lot more gold than investment banks have in the past decade (and propping them up has cost a lot more!).
However, ‘commentator’ supported Merryn. “I enjoyed the Olympics but you have committed the heresy of not subscribing to the compulsory national feel-good consensus. Cue much finger-wagging from the tutting puritans of our ruling clique. No doubt you were also one of those "unacceptable" people who failed to be "shocked, disbelieving and united in grief" over the death of Diana.”
It’s an interesting debate, so if you haven’t seen the blog yet, click here to read it in full and have your say.
Making money from insurance
Regular Money Morning readers will remember David Stevenson, who contributed regularly to the email before going on to become investment director at The Fleet Street Letter. It won’t surprise you to hear that David has found a great investment in the insurance sector – Aviva.
The firm has struggled recently and its share price has not recovered since the financial crisis. One reason is that Aviva has made mistakes, says David. “It’s made too many changes of strategy that haven’t worked out [and] chunky restructuring charges have soured investor opinion.”
Europe has been another problem. “With much of the EU heading back into recession, its European exposure has been a millstone. And there have been concerns that it has loaded up on too much dodgy Eurozone debt.”
More gloom comes from the regulators. “The EU’s Solvency II Directive on capital adequacy rules for insurers is set to come into effect on 1 January 2014.” The director is upping the “capital buffer” that insurers need. “Fears have circled that it may need to raise more cash via a right issue.”
So why does David like the stock?
Having analysed the latest results he notes the firm’s “capital position is already ahead of the position at end-2011”. That’s important because it means it won’t need to ask shareholders for more money. Better still, says David, “this stock is cheap. Very cheap… It is on “a discount to Net Asset Value of some 18%. That means you’re buying £1 worth of assets for 82p. That’s a hard deal to pass up.”
For more information on David's top tips, take a look at the following free investment report.
The latest bank scandal
Before I go, a quick nod to our video tutorials. Surprise, surprise the banks are now being accused of mis-selling yet again. This time the product is interest rate swaps. For anyone baffled by these instruments, Tim Bennett’s beginner’s guide is well worth a few moments of your bank-holiday time: Beginner's guide to investing: what is a swap?
• This article is taken from the free investment email Money Morning.
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