With the dust settling on the German election, MoneyWeek regular James Ferguson took a look at the consequences of Angela Merkel’s victory in this week’s issue of the magazine.
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James sums up the problem with the eurozone nicely. “Germans love the idea of the European experiment – if they don’t have to pay for it.”
Trouble is, they do. And now that Merkel is safely re-elected, the coast is clear for the bad news on bailouts and fiscal transfers to be broken to them.
James looks at exactly what that implies for European stocks and bonds in the magazine this week. If you’re not already a subscriber, you can get your first three issues free here.
However, one perhaps slightly odd beneficiary could be European airlines, as I noted in Friday’s Money Morning.
Airlines are awful businesses for lots of reasons. They are “ultra-sensitive to things they have no control over” and notorious for “keeping flights and routes open, even when they are losing money”.
Meanwhile, “competition has driven down prices, rising fuel costs have eaten into margins, and the global recession has hit passenger demand”.
However, with the US economy “recovering more quickly from the 2008 crisis than Europe”, the very lucrative transatlantic passenger routes are starting to get more business. And a shortage of planes means that “even if they wanted to, airlines would find it hard to increase capacity in the short term”.
Why is this good for European airlines particularly? Well, because if the euro weakens in the wake of any money-printing activity by the European Central Bank – and more QE remains the most politically palatable way to “solve the euro crisis” – this will hit the value of the euro relative to the dollar.
In turn, this will “give European firms a cost advantage” and “increase the purchasing power of American tourists, making a holiday on the continent more attractive”.
Interested in trading? You should speak to this guy
If you agree with James’ assessment of the European economy, you could short the euro. But trading currencies – or any other asset – is a tricky business. If it’s something you’re interested in learning more about, you should go along and see our trading expert, John C Burford, when he gives a workshop next month. The workshop is on 24 October, and spaces are very limited – find out more here.
Is QE hurting or helping Sainsbury’s?
On the subject of QE in the UK rather than Europe, Bengt Saelensminde looked at how money printing is affecting food prices – and the implication for the supermarket chain Sainsbury’s.
“If you want to understand how central banks are affecting your life, take a look at the supermarkets in your neighbourhood”. Why?
You see, “the liquidity effects of free-flowing cash from the central banks have put a rocket under assets like housing”. In turn, this “gives the rich confidence to spend money”. Meanwhile, QE has also “weakened the pound, causing price inflation for energy and foods”.
As a result, sales “at budget supermarket Aldi are up a massive 32.7% on last year, and rival Lidl grew an impressive 14.3%”. Of course, “at the other end of the scale, upmarket Waitrose grew a very impressive 9.7% too”.
So “both ends of the market are flying”. The budget end “is driven by necessity as family budgets creak, while the luxury end benefits from the feel-good factor from rising asset prices”.
So where does that leave a mid-market grocer like Sainsbury’s? Bengt tipped the stock nearly two years ago. Since then, “investors have not only earned a very respectable income, but the shares are also up by over a third – now trading at just over four quid”.
But with Sainsbury’s now in the “squeezed middle”, should you “sell?”
Actually – no. Inflation and competition might be biting into margins. But “companies like Sainsbury’s have managed to pass those costs on to the consumer and then some”. He suspects “price rises will keep the revenue and profits figures appealing”.
However, it’s worth “keeping an eye on those margins – if we see them slipping much further, then they could be crushed in the ‘squeezed middle’”.
The government does us a favour for once
That’s a nice return from Sainsbury’s over just a couple of years. And the fact is, “sensible investing isn’t about ‘getting rich quick’,” as my colleague Ed Bowsher pointed out in Thursday’s Money Morning. “If you just focus on lottery ticket plays, you’re more likely to end up in the poorhouse than the penthouse.”
However, there’s a but. Quite a big one. You see, “research shows that – if you take the right approach – investing in small caps can give your portfolio a real boost.” If you include dividends, notes Ed, then smaller companies have beaten the FTSE All-Share by 3.2% a year since 1955. That’s a huge amount over that period of time.
And better yet, the government has just made it much more attractive to go hunting for small caps, by allowing investors to put small-cap Aim stocks in their tax-efficient Isa accounts.
Certainly, you shouldn’t be drawn in by the tax break alone. Small stocks are riskier, and more illiquid. But it’s worth the risk for the potential returns, as long as you invest in the right way.
One option is to invest in “a fund that focuses on the bottom part of the market – perhaps “the Fidelity UK Smaller Companies Fund, which has beaten pretty much all its peers. Another option is The Throgmorton Trust (LSE: THRG), an investment trust with a solid long-term track record”.
Ed also notes that “my colleague Phil Oakley tipped a couple of small alcohol-related stocks last month, one of which has already performed very well.’”
And if you are interested in investing in individual small caps, make sure you’ve signed up for my colleague David Thornton’s free email, Penny Sleuth.
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A modest proposal for pensions
There’s a lot of debate about the house price boom around just now. We think it’s a bubble fuelled by a ridiculous, cynical attempt to bribe the electorate before the next election. George Osborne clearly agrees because he’s now setting up the Bank of England to take the fall for the Help-to-Buy scheme.
But if we’re going to have a bubble, maybe we could also get some help in solving the pensions crisis out of it. Our editor-in-chief Merryn Somerset Webb had a bit of a ‘blue-sky’ suggestion, in line with the party conference season. Given that retired people in Britain have “too much property and not enough pension”, she says, a state-funded equity release scheme is “an obvious solution”.
“People get old and they run out of cash, but as they can’t bear the thought of raising that cash by moving, it makes sense to borrow against the house and stay”.
While such schemes operate at the moment, they mostly “offer providers yet another marvellous way to exploit the mathematical incompetence of the UK population”.
As a result it makes sense to introduce, “some kind of state home reversion policy”. This would allow people “to borrow against the value of their home from the government at a reasonable rate of interest”.
After they die, “the home reverts to the state, which can then either keep it (solving the shortage of social housing problem too) or sell it back into the market, taking any profit their manipulated market offers up along the way”.
Indeed, “all sorts of councils offer deferred payment schemes with people’s property as the security when they need to go into long-term care. Under this system, your house is valued but not sold, the council pays your care fees, and you then pay back the debt on the sale of your house”. Merryn thinks that, “a national scheme along these lines – that could be offered to people whether they are going into care or not – might be worth thinking about”.
Her idea has produced a divided response. Website user r enthusiastically agrees. “Merryn, you should be an MP with ideas like this”.
But while he thinks that it is “not a bad idea in principle”, turbobug reckons the problem is that “the state can’t be trusted to run even the proverbial ‘Knees up in a Brewery’”. Engineer concurs. “Do you really want to see the state take over the housing market?”
‘Big bang’ for Chinese banks
On a different note, Lars Henriksson, who co-authors The New World newsletter with James McKeigue, has spotted something very interesting last week.
“The ninth-largest bank in China in terms of loans and deposits, struck up a strategic partnership agreement with [technology company] Alibaba”. This “suggests that a race to penetrate the banking sector is in full swing”, which could lead to “more competition”.
This has several implications. “With increased private participation, particularly from leading entrepreneurs in the internet sector, we could see a far better allocation of capital across China”.
Lars also thinks it will show that China is creating “companies with scale and ability to innovate”, and that “private industry can address serious imbalances in the economy. Overall, China is being reconfigured in a way that will allow it to become stronger and more efficient in the future”.
The full article is definitely worth reading, particularly as it’s one of the few optimistic pieces you’ll read on China at the moment.
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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