Stock markets rallied towards the end of the week amid suggestions that there might be some progress in the fight over the US debt ceiling.
And as Ed Bowsher pointed out in Tuesday’s Money Morning, it’s not just stocks that have taken a hit. The dollar has taken a hammering too.
Yet in the longer run, a rising greenback is almost “inevitable”, reckons Ed. There is one big reason for this: the shrinking trade deficit.
Since the early 1980s the US has had a current account deficit – Americans have imported more goods and services than they sold. Indeed, just before the financial crash, it was a whopping 6% of GDP. In short, they were “living beyond their means”.
However, things have “improved sharply since then”. The deficit is now only 2% of GDP – and set to fall even further. Shale gas has been a huge factor in this. Not only has it cut down the amount of gas and oil America needs to import, it has also cut the energy costs of US firms.
Along with rising wages in emerging markets, this has led many companies to move their offshore factories to the US. US investor John Mauldin thinks that the US could even end up running a trade surplus. That’s “good news for the dollar” since less money spent overseas should push up its value.
One way to take advantage of this is spread betting, though this is a bit short term for such a long-term trend. However, if you’re looking for dollar exposure, several good UK-listed companies do a lot of business in the US. For instance, fourth-fifths of Intercontinental Hotels’ (LSE: IHG) profits are generated stateside. GlaxoSmithKline (LSE: GSK) also gets a third of its revenue from America.
Overall, “buying shares in both companies strikes me as a sensible way to gain long-term exposure to the rising dollar”.
The valuations of US shares themselves are a “little high” at the moment, so we’re not keen on a simply US tracker fund. But later in the week, Ed flagged up four stocks in the US that are worth keeping an eye on.
The British retail recovery
Meanwhile, over in the UK, there’s been a lot of talk about the “death of the high street”. But things are finally starting to look up for our retailers.
As Ed noted in Monday’s Money Morning, the data looks good. Indeed, “consumer confidence is at its highest level since November 2007. And the most recent Confederation of British Industry survey found that retail sales are growing at their fastest rate for 15 months”.
Of course this is mostly down to George’s Osborne’s Help-to-Buy house-price-ramping shenanigans. But while this “won’t turn into sustained long-term growth”, it should at least provide a short-term boost, since “rising house prices tends to mean rising consumer spending”.
Ed recommends his “favourite retail share” Next (LSE: NXT). It still only trades at 15 times earnings. As well as growing both dividends and profits, its new stores are still “exceptionally profitable”. It has also managed to get its physical and online stores to work together – “around 40% of internet sales are collected from bricks and mortar stores”. It also has a homeware business that should benefit from the housing boom.
Of course, “you might feel a little reluctant to invest on the back of an election-driven economic rally”, so you might be tempted by a lower-risk option such as a supermarket. While Waitrose, isn’t listed, Sainsbury (LSE: SBRY) targets a similar part of the market. It certainly seems to be doing well, with same store sales rising for nearly nine years in a row. The only downside is its low margins, but it still looks a better bet than rivals Tesco or Morrisons, reckons Ed.
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Ireland is slowly recovering
The high street and the supermarket sector are not the only beneficiaries of a housing-led recovery in the UK. It should also help the export-driven Irish economy, which is already showing signs of recovery.
As I noted in Tuesday’s Money Morning, Ireland’s “two biggest trading partners are Britain and the US”. Thanks to the fact that that US consumers are also starting to spend, Ireland is “not as dependent on the troubled wider eurozone economy as you might think”.
Thanks to the smart decision to keep corporation taxes low, Ireland also remains “attractive to outside investors, which should allow its exports to keep growing strongly”. Overall, “HSBC reckons that Irish goods exports will grow by 6% a year from 2016 to 2030”.
While this is no boom, there are other positive signs. Unemployment has been falling steadily, and is down to the lowest level since 2010. The housing market “is also showing real signs of life” with Dublin house prices soaring by 11% and national prices going up 2.8% in the first eight months of this year.
As a result, the latest projections suggest a return to solid growth of 1.9% next year, increasing to 2.5% in 2015.
Of course, big problems remain. The deficit is still a problem and the debt restructuring will need to be revised. Unemployment still remains high. Overall, “it would still make sense for Ireland to quit the euro”.
However, despite the beginnings of a recovery, “the market still looks extremely cheap”. Indeed, it has a cyclically-adjusted price/earnings ratio of only six”. Irish exports will also benefit further from any ECB money printing. One way to benefit would be to buy the exchange traded fund listed on the US stock market.
Another would be to buy shares in ferry and freight firm Irish Continental Group (LSE: ICGC). After several tough years, it profits are growing at over 20% a year. While it trades on a 2014 price/earnings ratio of 16, it has a dividend of 4%.
Financial education is a waste of time
“The answer to every financial problem these days is usually said to be financial education”, writes our editor-in-chief Merryn Somerset Webb.
However, she doesn’t think that it’s actually that effective. Worse, it “offers an endless get-out clause to the financial services industry”.
In fact it might even encourage firms “to come up with ever more ridiculous products to bamboozle their apparently increasingly sophisticated clients”.
Instead, Merryn suggests that, “instead of going on and on about financial education, we would be better off teaching our children maths rather better, incorporating key concepts such as compound interest and the like into lessons”.
It might also be a good idea if the industry “was forced to make its products easier to understand”.
Of course, she is not the only one saying this. The behavioural economist Richard Thaler looked at previous studies and found that financial education courses, “had no discernable effects” on student understanding “just two years later”.
He therefore suggests, “quick bursts of tuition just before they make a decision: so offer mortgage mornings to late 20-somethings and lessons on student loans to A-level students”.
However, she thinks there is a simpler solution, “Find a way to make products much more simple for the consumer”. After all, “we don’t, expect people to understand the language of how cars work when they buy them”.
‘Impromptu’ thinks that, “the real problem” is “the shocking command of basic maths… even among professional 30-somethings”. After all, “you really don’t need A level (let alone degree) standard to be able to understand investment”.
Should you buy bitcoins?
If the US dollar doesn’t appeal right now, you might be more tempted by another currency that’s in the news – bitcoin.
With “no central bank or government to back it or debase it”, Dominic Frisby “cannot help but like” the digital money.
Bitcoin has hit the headlines again after the recent closure of underground website Silk Road – a sort of “Amazon for drug dealers” – by the FBI. The Silk Road accounted for about 5-10% of bitcoin transactions by some estimates.
And yet the value of the currency bounced back rapidly, despite the closure. This suggests that, “if bitcoin’s a bubble, it’s got a mighty thick skin”.
However, while bitcoin may not be a bubble, it’s also not somewhere to go if you’re looking for an easy return. “Control of money is what makes a government’s size and power possible. You can rest assured that governments will fight bitcoin, if they aren’t already, just as they did the Silk Road – if only to protect tax revenues”.
Investors need to ask themselves whether they “really want to risk having significant capital in something that will have the full force of governments stacked against it?” That’s not a battle Dominic is willing to bet on.
So “own a few bitcoins, if only to get a better understanding of digital currency. But use speculative funds only – don’t risk the house”.
We’ve looked at the Silk Road in more detail in MoneyWeek magazine. If you’re not already a subscriber, you can get your first three issues free here.
Oh, and if you’re wondering what to do with your Royal Mail shares, Ed will be giving his take in Monday’s Money Morning – look out for it.
In the meantime, you can watch Ed’s latest tutorial video – all about the difference between cash and profit.
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!
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