Earlier this week markets fell back sharply.
This is because it seems a lot more certain that the Fed will cut back on money-printing.
However, John Stepek thinks that this is “a major overreaction” – and a “very attractive” chance to pick up cheap shares.
Time to take advantage of the ‘taper tantrum’
John thinks the fact that the Fed has been coy about when, and by how much it’s going to reduce quantitative easing (QE) is making markets “jittery”.
This is understandable. But he also notes that investors “don’t seem to be quite getting to grips” with some of the key facts.
For instance, “there is no real economic pressure on the Fed to start tapering”. Unlike in Britain, where the Bank of England “looks increasingly to be between a rock and a hard place”, US inflation “isn’t particularly high”. It’s clear that low economic growth and relatively high levels of unemployment are still the biggest problems.
This means that, “if tapering begins, and it does cause a horrible overreaction on the part of the markets, it’s still quite possible for the Fed to throw things into reverse”.
“In any case, I think this is going to be a classic “sell the rumour, buy the news” situation. Think about it. The Fed is currently sticking $85bn a month into the bond market in one form or another. If it trims that back to, say, $75bn from September, then how much difference is that really going to make?”
Overall, “there’s a huge difference between slowing the pace of money-printing, and actively raising interest rates. This isn’t tightening monetary policy. It’s just a slowdown in the rate at which the Fed is loosening policy”.
It’s possible that, “markets will spend a lot of time between now and the September meeting jumping at their own shadows”. However, “when the big announcement comes, I think investors will wake up and wonder what all the fuss was about. And that will mean a market rally”.
Of course, “US stocks… still look expensive”. However, emerging-market stocks “have been hit hardest by the fear of the taper”. This suggests “that’s the place to go looking for bargains right now”.
As John notes, this week’s issue of MoneyWeek magazine looks at funds and stocks in two key areas: Brazil, and emerging Asia. If you’re not already a subscriber, you can get your first three issues free here.
Why you should invest with Templeton
Bengt Saelensminde, who writes our free newsletter The Right Side, also thinks that, “it’s essential that you invest overseas”. He also believes that “specialist advice goes a long way when you’re investing in emerging markets (EM)”.
In his view, “the best investment manager in the emerging markets is the legendary Mark Mobius of Templeton investments”. He also notes that, “Mark presides over 17 regional offices, and he is often referred to as the ‘dean of emerging markets’ – a title that’s probably got something to do with his PhD in economics”.
It should come as no surprise that he recommends Mobius’ main fund. “The Templeton Emerging Markets Trust (Lon: TEM) is a London-listed investment trust that has been around since 1989, and is the biggest EM fund in the UK. Its track record is impeccable. Over ten years, the fund is up 367%, which compares very well against its benchmark, the MSCI emerging markets index, up ‘only’ 241%”.
As well as the past performance, Bengt also likes the trust’s portfolio. “As of the last investment report, the fund was overweight energy, consumer discretionary, materials and financials. Excepting financials, I really like the areas the fund is focusing on. The fund is overweight China, Thailand, Brazil, India, Indonesia and Turkey. This is a roll call of the developing world’s big hitters. With 68% invested in Asia, the focus is very much one of Eastern opportunity, something that chimes with my long-term perspective”.
However, in his view, the most compelling reason for investing is that “it is currently trading at a 10% discount to the value of its assets”. Indeed, “when investment trusts are popular, you’ll find them trading at a premium to assets. It means this fund could outperform any rise in the underlying market”. Overall, this is “a very worthy investment”.
"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd
HS2 costs spin off the rails
Merryn Somerset Webb has been critical of high-profile infrastructure projects that have “destroyed more value than they have created”, especially the plans for high-speed rail (HS2). Last year, she threw some cold water on optimistic official projections of the costs and benefits, which “appeared to be close to nonsense”. She also warned that similar projects have “destroyed more value than they have created”.
Returning to the topic in her blog, she is not surprised to learn that costs are starting to mount, even before ground is broken. “In 2012, the total cost estimates came in at around £33bn. By early this year, they were up to £34.5bn. In June, we got the latest official estimate in at £42.6bn (in 2011 prices)”. The FT has now revealed that, “the internal Treasury opinion is that the final cost will be more like £73bn (2013 prices)”.
She also notes that, independent estimates from the IEA (Institute of Economic Affairs) put it at £80bn”. This means that, “even if you take the lower figure (and adjust it back for inflation), we are already into a 100%-ish cost overrun from 2012. Oh dear.”
Readers seemed to agree with her. “HS2 will suck even more business into London – the last thing that we need”, writes ‘Mombers’. ‘Colin Selig-Smith’ thinks that even the IEA is being too generous, in his view: “…once all is said and done”, the total could “come in somewhere around 150 billion GBP”.
Some lessons from missing out on £1.7m
While investors can learn from their successes, “the real lessons I’ve learned as an investor have come from more disappointing experiences”, writes David Thornton in The Penny Sleuth. While his story about investing in ASOS still makes him “feel queasy”, it taught him some “brutal lessons”.
“Back in April 2004, I heard about this small internet-only fashion retailer whose name was an acronym for As Seen On Screen. Their niche was to copy the latest designer fashions worn by celebrities and sell them for a fraction of what the original would cost”. Liking the model, he “had a punt” and bought “a few shares” at 24p. “The shares rose and about six months later, they were 70p. Almost trebling my money in such a short space of time was too tempting, so I sold around half the holding”.
The shares then declined. Instead of taking the chance to buy them back, he then “sickeningly” sold his remaining holdings. However, if he had done nothing, “those 37,651 shares would today be worth £1.7m! ASOS has risen from 24p to over £46 for a gain of 19,000%”. As he recounts, “I had it in my keep-net, watched it grow fatter, and then released it back into the investment sea for it to become a blue whale”.
David outlines six key lessons from this experience. To learn what they are, read the full article here.
One oil company that offers great value
Finally, on Wednesday, I took a look at BP – and why it is undervalued.
One of the reasons is that there seems to be some light at the end of the legal tunnel. “One of the big negatives hanging over BP has been uncertainty regarding just how much it would have to shell out in terms of fines and compensation. However, there are signs that the company may be succeeding in its attempts to slow down the rate of new claims.
“As part of the post-disaster settlement, BP agreed to set up a $20bn trust fund that would pay compensation directly to those affected. However, BP now argues that the claims process has gone too far in the other direction, allowing all manner of frivolous claims”. They’ve now found “some pretty compelling evidence” of “an obvious conflict of interest”. Because of this they are now “trying to claw back an estimated $1bn that was overpaid”.
In any case, “the trust fund has only $300m left in it”. As a result, “remaining claims will have to go through BP”, which “will allow them to control the pace of payments, and reduce the risk of frivolous claims”. At the same time, “BP is also having some success in getting the two other firms involved in the disaster, Halliburton and Transocean, to share the burden. And the company is also close to cutting a deal with the US justice department to resolve the major outstanding charges”.
Thanks to the cash from asset sales, “BP has decided to raise its dividend and buy back up to $8bn worth of shares. It is also set to increase the amount spent on investment”. Indeed, “JP Morgan thinks the company is now on course to return to its pre-crisis drilling rate of 15 to 20 new wells each year”.
In addition to the reduced legal problems, and the extra investment, “the biggest reason to buy in is also the simplest – it’s cheap. BP trades at just 5.1 times its earnings. It is also valued at only 1% above its net assets. Finally, it has a yield of 5.26%.
All this makes it “very attractive compared with its competitors”. Indeed, “Exxon trades at 11.6 times earnings, and 134% over its book value. Even Royal Dutch Shell, a more conservatively valued company, trades on a price/earnings (p/e) of 8.7 and is valued at a 20% premium to its book. Both Exxon and Shell have lower yields of 2.9% and 4.8%”.
Of course, I’m not the only one looking at BP. My colleague Phil Oakley delved into the attractions of BP’s dividend in more detail in this week’s issue. Subscribers can read it here.
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Have a great weekend!
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