In this week’s Penny Sleuth David Thornton takes a look at the rise of robots. He notes that in Amazon’s warehouse near Swansea a robot, which “works 24 hours a day and it fulfils four times as many orders as a person”, does much of the work. In fact it’s been so successful that Amazon “bought Kiva, the company which makes the robots, back in 2012”.
More generally, while automation “does destroy jobs in the short run”, it can also “raise productivity and efficiency by leaps and bounds” and is “a huge opportunity for investors”.
While early automation hit blue-collar jobs, it is now “chipping away at those middle-income jobs that most of us would have thought safe from being stolen from us by machines”.
For instance, in his Red Hot Penny Shares newsletter he’s tipped a speech recognition company that automates the process of cinema box offices. Not only is this cheaper, but “customers actually prefer the quality of service from the computer”.
At the same time, big data and cloud computing is “going to be easing a lot of data analysts, marketers and even lawyers out of their jobs”. While such change will be “unsettling and challenging”, it “isn’t going away”.
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Property could be in trouble after the election
As well as savers and those about to retire, it’s easy to conclude that another big winner from last week’s Budget was property.
As I highlighted this week, George Osborne has extended part of the ‘Help to Buy’ scheme all the way until 2020. However, while he wants to make sure the current property boom continues until the election, “I wouldn’t rush out to stick all your newly-freed pension money into buy-to-let”. Indeed, he’s announced a “sting in the tail”, which “could hit central London property hard”.
The key fact is that Osborne has “only pledged to keep the first part of the scheme running until 2020” – the part of the scheme that is only available for new-build properties.
This means that the second part, which applies to all homes under £600,000, and involves the taxpayer underwriting mortgages, could be reduced, or even scrapped. Of course, the chancellor is likely to wait until after the election. However, the fact that Labour has been critical of the scheme suggests that whoever wins in May, “the second part of Help to Buy at least is on borrowed time”.
This could have a big impact on “the bubbliest of all the UK property markets – London”. The latest evidence that prices in the capital are “completely out of control” is “ghost gazumping”. This is where “estate agents are ringing sellers, and persuading them to re-list their homes at a higher price, even when there is no specific buyer available”. This shows “just how rapidly price expectations have shifted in a very short space of time – and the extent to which this is a sellers’ market”.
One thing that “could end up being a turning point” are changes to capital gains tax. At the moment, “non-resident owners have been exempt from capital gains tax (CGT)”. This “has made London properties, particularly prime ones, attractive as ‘safe havens’ for foreign money”. However, from next April (just before the election), “this exemption will end”. This “makes London property less attractive than the likes of France (which also has CGT, but reduces the rate depending on how long you hold an asset for)”.
Overall, with interest rates “likely to rise after the next election”, it’s clear that “the housing market will face a tougher time next year”. This “could well be enough to stick a pin in the already over-priced London market”.
Trade your London flat for a Wiltshire manor
Our editor-in-chief, Merryn Somerset Webb, also thinks that London property is in the middle of a bubble. She thinks that “those who have made vast gains in the London market take advantage by selling up and moving out”. This is because “the gap between London property and non-London property is the widest it has ever been”. However, she warns that, “it makes sense to think it will start to close again”. Even if London prices don’t fall “the gap will simply narrow back to historical norms as house prices elsewhere rise”.
For the moment, London continues to outstrip the rest of the country. However, “not all of London is in the eye of the boom”. Indeed, if you look at price changes by postcode, you will see that some parts of the city are seeing prices barely budging”. Another negative factor for prices is that, demand is starting to create “its own supply”. For instance, “more than 150 new residential towers are planned for central London at the moment”. Even the property firm Savills, “concedes that there are already enough homes planned in the coming years to satisfy demand at the top end of London’s housing market.
Merryn therefore thinks, that, “assuming you want to live in a Wiltshire manor house rather than a three-bedroom terraced mini-home in Balham”, it is still “a good time to make the trade”. User ‘Gavin’ agrees with Merryn’s conclusions, pointing out that, “every single penny of out-performance by London in the run-up to the 1989 crash was given back in the bust”. He also notes that after the 1972 property crash led to negative interest rates followed by “another minor bubble and crash”. He wonders, whether “that pattern will be repeated now”.
Mexico’s oil boom starts now
This week James McKeigue, who writes our New World newsletter, takes a look at the sweeping changes in the Mexican oil industry.
From satellite photos it’s easy to see that are a lot of working rigs in the US part of the Gulf of Mexico, and far fewer on the Mexican side. The difference is down to politics, not a lack of oil. While the decision to end a prolonged workers’ strike by taking the oil industry into state hands in 1938, “may have made sense at the time”, it ended up creating a “monster”.
“State control has proven to be a strait jacket for the Mexican oil industry”. While experts “estimate that Mexico is sitting on reserves of 150 billion barrels of oil equivalent (BOE)”, the state company Pemex “has only explored 20% of the country for further reserves”. This is down to “a combination of poor governance, bad investment decisions and structural problems”. The good news is that “Mexico is finally taking steps to address this and for the first time in 76 years, the country is opening its energy industry to foreign investors”.
The effect that private enterprise can have on the energy industry is shown by the example of the USSR. Like Mexico, it had failed to take advantage of its natural resources, due to “a creaking state oil company”, “poor technology” and “corruption”. However, the collapse of communism meant that “Russia is now the world’s leading oil producer, cranking out almost 11 million barrels per day”.
“From Azerbaijan to Siberia, IOCs have invested hundreds of billions of dollars in new projects in the borders of the old Soviet Union”. By letting the private sector invest, Mexico could now “become an oil giant in its own right”.
You can sign up to The New World here – it’s free.
You need to watch out for ‘closet trackers’
Ed Bowsher is glad that he’s not a wealth manager. They are always under pressure to pick conservative so-called “quality” stocks. After all, “if an investment in Unilever performs badly, the client doesn’t mind”. However, “if a value play goes wrong, the client is furious” and may threaten to take his money elsewhere. This example illustrates how “career risk” forces fund managers into fashionable, over-priced shares that “are not necessarily good for the likes of you and me”. It also shows that “you should either manage your money yourself – or choose very carefully when you give the job to someone else”.
Career risk has other effects. Most funds are measured against a benchmark, which means that if “if you’re a fund manager and your fund only falls by 4%, you’re seen as a success. But, for most people, “a 4% fall is a failure, regardless of how good it is compared to other investments”. Benchmarking also tempts managers to build a portfolio “that is very similar to the benchmark”. While this may help protect a fund manager’s job it means “you could end up paying 0.75% a year to invest in this index-hugging fund, when a cheap index tracker fund would be just as good”.
Of course, there are some fund managers “who are doing the precise opposite of what I’ve described above – taking big bets on a relatively small number of companies, and trading only when they see opportunities”. For example, Nick Train, who manages the Finsbury Growth and Income investment trust (LSE: FGT), has only 25 companies in his portfolio “and the fund has absolutely thrashed the benchmark”. Of course, you can always “take charge of your own portfolio”, with the recent Isa and pension changes giving more freedom and responsibility to savers to look after their own future.
We have more details on the changes – and what they mean for you – in the next issue of MoneyWeek magazine, out on Friday. If you’re not already a subscriber, get your first three issues free here.
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