MoneyWeek roundup: Investing in a troubled world
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Associate Editor
David Stevenson Jan 07, 2012
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A Happy New Year to you!
• 2011 – in particular the second half - was tough for most investors. Can we expect better times ahead in 2012?
Global stock markets did get off to a good start. The FTSE 100 jumped up by more than 2% on Tuesday. But "is 2012 a turning point?" asks John Stepek in Money Morning. "Probably not. We're in a long period of paying down debt rather than building it up. That didn't change when the calendar moved from 31 December to 1 January".
How will this all play out? Most predictions will – as usual - be well wide of the mark. So John's been seeking out a different view.
"It's often worth listening to hedge fund managers", he notes. "They aren't restricted to one investment style or sector, and can also profit from selling stocks short. You won't just get the 'it's never a bad time to buy stocks' view you often get from standard fund managers".
John spotlights one hedge fund that really hit the spot last year with its calls on gold and bonds. And the future, say these hedgies, will consist of "slow growth, high unemployment and low interest rates for a long time to come".
• "How do you invest in a world like this?" asks John. In fact, there are still some opportunities out there. "For stocks, it makes sense to stick with high quality defensive plays. The FTSE 100 has plenty of globally exposed blue chips. But it's worth looking further afield to the US as well. If we get a stonking economic recovery, multinationals will still do well. And if we don't, they'll hold up better than other companies".
Another very promising-looking sector "that could provide a very pleasant surprise" is natural gas and alternative fossil fuels such as shale oil.
"This is a theme we've been looking at regularly over the past couple of years (you can read my colleague James McKeigue's most recent MoneyWeek magazine cover story on the topic), and we'll be returning to it very shortly in Money Morning". Meanwhile, you can find out about our experts' buys for 2012 in yesterday's MoneyWeek magazine. If you're not already a subscriber, get your first three copies free here.
• One area that's very looking grim, though, is UK general retailing.
As I wrote on Thursday, "Christmas is a critical time of the year for Britain's shopkeepers". But there's been very little to celebrate this festive season. Reports of holiday season trading are starting to come in. And they're hardly glad tidings for the high street – or shareholders. Further, "things look set to get even worse. Most of the same problems that afflicted the UK in 2011 will continue into 2012".
Why? UK shoppers are going to remain squeezed this year. Pay packets are growing more slowly than the cost of living. Average earnings are rising at 2%. That compares with inflation of around 5%. So there's less spare cash to spend on non-essentials.
On top, borrowing money to plug gaps in household budgets remains tough. With Britain's economy likely to slow even further amid the crisis in the eurozone, there will be fewer jobs and longer dole queues. All in all, that means even less money around to spend in the shops.
It all points to a nasty ending as many retailers will run out of money and go bust amid forecasts of a year of "carnage" for the sector. The number of insolvencies could top even a horrendous year like 2008.
It's no wonder that share prices in the sector are being driven down. Yet even here, this may be serving up a buying opportunity for investors in one stock.
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• Merryn Somerset Webb has been examining why money isn't worth anything like it used to be.
"If you ever wonder quite how often financial history can repeat itself before we get some kind of a long-term grip on global economics, you might consider some New Year reading", she blogs.
You can find out which book she's recommending here. It "relates the early history of modern money invented in China. By the 1020s the state had given itself the sole right to issue paper notes. This started out as a perfectly good idea - easy to carry and use, and also fully backed by the actual metals it represented (bronze and iron coinage and silver bullion)".
But then, you won't be surprised to read, things started going wrong. The government started fiddling with its currency.
"By 1127 the coinage was heavily debased by lead. And the demands of various conflicts led to enough money printing to mean 'unashamed paper inflation was in full swing'. Sounds familiar doesn't it? By the time the Song dynasty (960-1279) had come to an end its leaders had presided over a near-95% depreciation in the value of their currency".
"For what happened next", says Merryn, "you might get your own copy of the book. But the short version is that this cycle from sound money to debased money and back again appears endless (here's a nice list of hyperinflations). It's done everything from encouraging "widespread entrepreneurial misdirection" to engendering corruption, inciting insurrection and dragging us all into the hellfire of war".
Grim stuff. But it's well worth a read.
• Merryn's also been blogging on another big change facing the West. "The last decade has seen a great race by manufacturers to shift production to Asia", she says.
"For them that's meant lower costs and higher profits. For us it's meant years of falling prices for everything from clothes to computers. And for much of Asia it's meant the rise of an increasingly well-paid workforce and large trade surpluses. But look around you now and you might just be seeing the beginning of a change in direction".
Is this all far too remote from us here in Britain? Anything but.
"Fashion designers in Europe have started to talk about moving their production home. Why? Because fast wage increases in China mean that once you factor in cargo costs, the rising Chinese currency (up 8% against the dollar in the last 18 months), six-week-plus lead times and quality issues, it now makes sense to manufacture in Italy or even in London. It doesn't cost much more, and it's a whole lot easier".
So what does this mean for investors? "You might call all this a 'great equalisation'. It shows how very 'globally mobile' the world's big companies are", says Merryn. Nowadays well-run international companies are likely to recover from a traumatic year such as 2008 more quickly than their home economies. And that could be a good clue about where you should be investing your money now.
• As ever, Merryn's blog attracted a number of comments from readers – for which many thanks.
"Have you been to Italy lately?" asks 'Boris MacDonut'. "There are up to 200,000 Chinese in Italy, mainly skilled textile workers. They are there so that Italian high fashion can be referred to as made in Italy. But the skills are held by Chinese labour, which is often not in Italy legally and is paid way below minimum European wages. The work may come home but the workers follow it!"
"Look around at how many large factories have been closed and demolished, to be replaced by wasteland, houses or warehouses for imported goods", says 'NeutronWarp9'. "Senior management and shareholders think themselves clever to cut costs and increase profits. But it's all short-term benefit at a huge social cost. When will we all wake up? Targeted protectionism must be part of the solution".
That's certainly one view, though I'm not sure we'd all agree with it. So if you'd like to have your say, please do.
• Another of my colleagues has also been hard at work this week – our video tutorial maestro Tim Bennett.
"Baffled by the jargon-filled world of derivatives?" he asks. "You are not alone. Yet they're a vital part of the global markets. After being blamed for much of the credit crunch they are also attracting attention from regulators. In Europe for example there is talk of a special "Tobin tax" on financial transactions including derivatives".
Tim has just put together a beginners guide called 'What are derivatives?' So in less than ten minutes, you can find out all you need to know. And if you like that, then do try his other related videos – they're all free – called 'What are futures?', 'What are options?' and 'What are swaps?'.
To hear about other bits and pieces on the internet that have amused us or made us think, sign up for our Twitter feeds – we've listed them below.
Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• David Stevenson
• This article is taken from the free investment email Money Morning.
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