MoneyWeek Roundup: Profit from water wars
James McKeigue Mar 02, 2013
The Italian elections gave the market a scare this week. The inconclusive election result reminded investors of just how many risks remain out there.
Yet believe it or not, shocks like this can create excellent opportunities for investors, says John Stepek in Tuesday’s Money Morning.
There’s no doubt that the situation in Italy is messy, says John. The debt-laden and stagnant Italian economy desperately needs reform. But voters made it clear that they don’t want it. That sounds like bad news.
But it might in fact be a great opportunity for investors. Because this chaos “takes the European Central Bank (ECB) one step closer to doing full-blown quantitative easing (QE) and printing money to bail the eurozone out of its depression. It won’t have a choice.”
The reason, says John, is that Italy has a lot of economic clout. “There is no question of pretending that Italy can leave the euro; it’s the third-largest economy in the region. Germany can’t call Italy’s bluff, as it tried to with Greece. If Italy leaves the euro, you can kiss the euro goodbye.”
More to the point, says John, “just like the Greeks, the Italians aren’t desperate to leave the euro. They might not be keen on austerity – funnily enough, no one seems that keen on higher taxes, lower wages, and fewer benefits – but... this was an anti-austerity vote, not an anti-euro vote. The preferred route for Italy would be a weaker euro, not a return to the lira.”
All in all it means that eventually Italy’s problems will force ECB head Mario Draghi to deliver on his promise to do “whatever it takes”.
This doesn’t meant that the euro can stick together in the long run, nor that money printing is a cure-all for economic problems. “But if there’s one thing we’ve learned over the past four years or so, it’s that printing money boosts asset prices. We’ve seen it in the US, the UK, and recently even Japan. So if Europe is going to print money, you should probably be in European stocks.”
Just don’t feel like you have to try to time the market – it’s never the easiest thing to do. Instead, you can just drip-feed a steady flow of money in to European equities.
Get ready for the water wars
Over at The Fleet Street Letter a very different region has caught the team’s attention – the Middle East. In last week’s edition, David Stevenson explained why. “The Middle East is notorious for its volatile politics. A great deal of that instability is due to the changing price of a single key commodity: oil.
At the moment, the region remains well stocked with crude. But another vital resource is much less plentiful. And as supplies begin to run out, the Middle East could yet face future conflicts over it. Indeed, some experts reckon that globally, future wars will not be about oil – but water.”
David takes particular interest in a little-noticed comment from Crown Prince General Sheikh Mohammed bin Zayed Al Nahyan at last month’s International Water Summit. “For the United Arab Emirates,” he said, “Water is (now) more important than oil.”
Of course, David being David, he’s more interested in the investment implications than the political ones. The first thing to get your head around, says David, is that water is more scarce than you think.
“At first glance, there appears to be no shortage of water on the planet. Seventy per cent of the earth’s surface is covered by water. Further, the average ocean depth is around 1,000 metres. If you add up the overall amount of water on the planet you’ll find it comes to something like 326 million trillion gallons.”
That’s an unimaginably large number, admits David. “Yet the overall figure is deceptive. Estimates vary, but roughly 98% of the earth’s water is seawater. That means it is salty and not ‘potable’, ie drinkable.
“Of that 2% fresh water, 1.6% is locked up in the polar ice caps and glaciers. Another 0.36% is found underground in aquifers and wells. It boils down to this. Only about 0.04% of the world’s water is found in lakes and rivers. That’s still thousands of trillions of gallons, but it’s very small compared to the planet’s overall water supply.”
That tiny remaining supply is being depleted all the time, says David. Pollution is rendering more and more of it undrinkable. Meanwhile population growth and urbanisation are increasing demand for the clean water that’s left.
This is a megatrend that will throw up lots of investing opportunities as governments and corporations attempt to solve the problem. Indeed David has found two stocks that he thinks are well placed to benefit from the trend. One of them is 30% up since he first tipped it, while the other is a company that he’s just uncovered.
I can’t give away those tips here. What I can do though is show you David’s latest report. In it he explains a handy strategy that allows you to receive twice as much income as a regular punter with the same shares. If you haven’t read it yet you’re missing out.
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Why falling bonuses may push up house prices
Back in Europe, politicians decided this week to curb bankers’ bonuses. It’s a move that’s sure to play well with many voters. But on her blog, Merryn Somerset Webb explained why it could actually bump up London house prices.
“You can read endless past articles by us on our conviction that the London property market is grossly overpriced, but just because it is overpriced in sterling doesn’t mean it can’t get more overpriced”, says Merryn.
“Let’s not forget that every word Mervyn King utters in his efforts to force down the pound makes the houses we can’t afford to buy just that little bit cheaper for anyone buying in a foreign currency. Cut-price safe havens for them; a move further into the suburbs for the rest of us.”
And that’s why she thinks this latest bonus ruling could affect the market. The logical argument is that the cap would encourage well-paid bankers to leave London and force down prices.
But it probably won’t work out that way, says Merryn. “Some bank employees might move abroad – those for whom performance really has to be the basis of remuneration – and perhaps young people who haven’t already spent a decade trying to get their kids into the Lycée. But the rest will stay for a while. So demand is unlikely to fall dramatically – in the short term at least.”
Indeed, the price bankers can pay for houses might actually rise rather than fall, says Merryn. Citing her twitter acquaintance @Shinsei1967 she suggests that “base salaries will... at least double to take account of the lower bonus environment. And given that it is easier to get a big mortgage if you have a salary of £500,000 rather than a salary of £200,000 and ‘expectations’ of a £500,000 bonus, we can expect prime property prices to just keep rising.”
It’s counter-intuitive stuff, and it immediately sparked some reader feedback.
‘Richard’ didn’t appear convinced, drily commenting: “The first in a series from Moneyweek... next week: How dry weather is to blame for flooding...”
However, ‘JREwing’ agreed with Merryn’s point, and stresses the importance of looking at London house prices in various currencies. “How have London prices performed in US Dollars, Japanese Yen, Swiss Francs, Chinese Yuan, Hong Kong Dollars, Singaporean Dollars, Canadian Dollars and Australian Dollars in the last five years?” he asked. “Much, much worse than in sterling. In some of these currencies the prices have actually declined.”
If you’ve got a view on the subject click here to have your say.
The central bank gold-buying spree
In this week’s Metals and Miners newsletter, Simon Popple took a look at the latest developments in the gold market. “It's been a tough month”, says Simon. “The gold price has taken a bit of a beating.”
But nevertheless Simon is keeping faith in the long-term prospects of the yellow metal. Indeed he actually thinks the current lull is a massive buying opportunity. Why? Well it’s all because of central bankers. Probably best if I let him explain.
“As you may know, many central banks are aggressively buying gold to provide more substance to their currencies, in the event of another financial crisis. Here's a picture of total central bank reserves since the last crisis in 2008.”
Source: IMF, CPM Group, Casey Research
“So central bankers have been steadily stockpiling gold, whether the price of it is rising or falling. Listen to what central bankers are telling us... what they say with their actions, not their words.
“Bloomberg recently reported that Russia is now the world's biggest gold buyer. Its central bank added 570 tonnes (18.3 million troy ounces) over the past decade at $1,650/ounce that’s $30.1bn worth of gold.
“Russia isn't alone. Central banks have been net buyers for at least two years... To put it in perspective, on a net basis, central banks added more to their reserves last year than since 1964.”
Even more exciting, says Simon, is that China hasn’t officially reported its gold reserves since 2009. “According to IMF data, The Chinese central bank holds an official 1,054 tonnes of gold in its reserves. But Jim Rickards, a highly respected hedge fund manager, thinks that China has probably already accumulated between 2,000 and 3,000 tonnes of additional gold reserves.”
All of this raises one question, muses Simon: what do central banks know that we don’t?
Indeed Simon believes he’s uncovered a trend in the gold market that’s likely to herald bumper profits for shrewd investors. He’s prepared an in-depth report detailing exactly what’s happening, how he’s planning to profit and how you can join him.
I’m told his report is almost ready. We’ll be sending it to you a week today – next Saturday. So keep that in mind as you watch the gold markets this week.
How you can be like Buffett
One of the biggest deals so far this year was Warren Buffet’s $28bn joint purchase of Heinz. The move caught the market by surprise with a lot of commentators suggesting that Buffett may be starting to lose the plot. My colleague Phil Oakley investigates it in depth in a recent article.
The deal has also been the inspiration for Tim Bennett’s latest video tutorial. Warren Buffett regularly buys billions of dollars’ worth of preference shares. Tim explains why, and how you can add them to your portfolio.
• This article is taken from the free investment email Money Morning.
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