The pound is surging. Factory output is rising. Companies are happier. House prices are rising.
Is this an epic recovery? Nope, says John Stepek, “just the usual British story of boom and bust”.
What’s more, when the next bust comes, it’s going to be a cracker.
The ‘boom’ will lead to another bust
“One reason Britain was so vulnerable when the global financial crisis hit in 2007 and 2008 was because households were so indebted”, argues John. The other factor was “massively overpriced” housing. Sadly, John thinks that the government looks set to repeat past mistakes.
In a race to get the economy booming in time for the 2015 election, the coalition is pumping up the housing market for all it’s worth. “Rising property prices make people feel wealthier. Rising housing sales mean higher sales for property-related goods – ‘big ticket’ items such as kitchens and bathrooms”.
Unfortunately, “all of this depends on cheap debt. And debt can’t stay cheap for very much longer” with the economy rallying like this.
Bank of England boss Mark Carney “will resist raising rates before the election with every ounce of power he can muster”. And that means that in the short run, “companies that profit from a housing bubble in particular will probably continue to do well”.
However, in a few years’ time, this “sugar rush” will “give way to reveal an economy that’s potentially even more vulnerable than when we went into the crisis.” This means that, “the economy runs the risk of another house price crash further down the line”.
We looked at some ways to make money from this “short-term, debt-fuelled recovery” in last week’s MoneyWeek magazine. We’ve also covered Germany, which is going through “a more sustainable consumer boom”. If you’re not already a subscriber, get your first three issues free here.
How to profit from the booming car industry
One way to profit in the short term from any cyclical recovery is to buy into economically-sensitive businesses, In yesterday’s Money Morning, I noted that the car industry is making a comeback.
China and its low but growing car ownership is one factor in this revival, but another key factor is America. “Car sales are suddenly booming in the US, growing by 17% year-on-year. Indeed, sales are now running at close to the pre-crisis peak. Even the price of second-hand cars is increasing, with the used car dealers’ trade association predicting a shortage”.
There are several reasons for this. “A strengthening economy and jobs growth has left more people in a position to consider purchasing a new car”. However, “the simple need to replace old stock is going to be enough in itself to boost US sales for the next few years”.
A ready supply of credit is also a big positive. “With interest rates still low (despite the recent squeeze), buying a car on finance looks cheap which means dealers don’t have to offer as many discounts, or other incentives, to boost sales. That in turn means more profit for the manufacturers”.
At the moment, we’re tipping Volkswagen AG (LSE: VKW). With few exceptions, “most of its models are in the solid mid-range bracket”. This means that VW “has a good chance of winning over US consumers who are now buying for the first time in several years”. At the same time, “its joint venture with the Chinese First Automotive Works gives it exposure to the rapidly-growing market”
As a result, VW “is projected to maintain solid revenue growth of around 4-5% a year until 2016”. Despite this, it is “cheap” with at a forward p/e of 7.8. “It also trades below the value of its net assets, which makes it a lot cheaper than several of its rivals”.
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Why a mansion tax is a bad idea
In her blog, Merryn Somerset Webb looked at the LibDem’s favourite idea of imposing a ‘mansion tax’ on properties above £2m. It’s interesting in some ways, because “it is effectively a location tax”.
But in all, “it’s a shockingly bad idea”. That’s because it “doesn’t replace any of the bad taxes we already have. It just piles on top of them”. She notes that, at the moment, “we get stamp duty, we get inheritance tax (some people consider this an income tax on the living, some a property tax on the dead) [and] we get council tax”.
Supporters of the proposed levy claim that it will be “a tax on the rich, and only the rich”. The problem is that “all taxes eventually trickle down until they are paid by all but the homeless and destitute (witness income tax). And so it will be with the mansion tax”.
Indeed, in order to bring in the promised revenue from the tax, it will have to apply to a lot more people. “Knight Frank has just done an in-depth study of the £2m-plus property market in the UK… and found that, without extending the tax down to at least all houses costing £1.25m or raising it well above 1% a year, there is no way it will raise the £2bn claimed”.
Merryn also notes that, “even if the threshold were set at £2m”, not adjusting the limit for rising house prices means that “there would be 775,500 houses paying the tax within 25 years (that’s all houses currently worth £540,000 or more)”.
Overall, the proposal “puts in place the infrastructure for a tax attack on the middle classes”. She suggests that, “the Lib Dems should give it up”.
Commenter GFL thinks the main lesson from this is that “always the squeezed middle and upper middle will get hit the hardest. This sector is a cash cow, they cannot easily move their money or life and there are a lot more of them”.
How you can beat fund managers at their own game
Dr Mike Tubbs is a big critic of the “short-termism” of fund managers. He notes that, ”there have been two big trends in developed stock markets over the last few decades – a falling proportion of shares held by individuals and a shrinking ‘holding period’ (the average time a share is held)”.
There are several reasons why fund managers churn their portfolios. For instance they “feel pressure to work hard” and “may benefit from fee-generating activity”. Their “short-term bias” is also strengthened “by an obsession with quarterly results”. They also “may want to remove certain stocks from their portfolios before lists of holdings are published”.
This can be seriously counterproductive. “Research confirms the low returns from short-term investing. For example, a study by three US academics in 2012 (Chakrabarty, Moulton and Trzcinka) concludes… that the average returns for trades held less than a year are mostly negative”.
In contrast individuals, “do not have the pressures of an obsession with quarterly performance or the need to appear to be doing something with our investments all the time”.
This allows them “to pick reasonably priced and sustainably profitable companies that can grow significantly faster than average so that, after some years, the magic of compounding will do wonders for their share price and dividends”.
Dr Tubbs think that, “one of the best ways of beating the market is to use the Research Investments criteria”. He strongly believes “that shares in good companies meeting the five criteria are likely to weather short term storms or rebound strongly after a market dip”. To learn what they are in more detail, and to find out which companies meet his standards, subscribe to Research Investments.
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