As my colleague John Stepek points out, “markets took a bit of a hit” on Thursday. While this wasn’t a huge slide, it does show that “when you’re priced for perfection, just about any hint of an adverse breeze can knock you off your perch”.
Worse could be in store. Despite the bullish sentiment, “there are also disquieting things happening on the fringes of the financial world”. For instance, “the Argentinian peso’s steady slide against the dollar turned into a rout”. Similarly, “the Turkish lira needed propping up by its central bank yesterday”, while “the Russian rouble hit its lowest point since 2009 against the dollar”. In China there’s a big scandal caused by “banks selling unsuitable savings products linked to very dodgy investments to yield-hungry investors”. John worries that this looks “a lot like the sub-prime crisis”.
Closer to home, slow monetary growth and falling prices, are a “real threat” to the European market. Unfortunately for bears, “central banks have us all well trained”. If there are any problems, perceived or real, “they’ll just print more”. With talk about deflation, “there’s little to stop them right now”. This means that, “you can’t yank all your money into cash on the off-chance that today is the day that it all goes wrong”. The only solution is to take our advice to “buy what’s cheap, and avoid what’s expensive”.
Examples of cheap markets include “Japan, various European ones, and selected emerging markets”. However, John thinks that one asset class that “is starting to get interesting again” is commodities. Of course, “investors hate them”. However, this means that, “all it takes is a little turn in sentiment for them to get a lot more expensive from here”. Indeed, “there is a range of scenarios that could turn out to be positive for commodities”. Money printing would lead to some of it flowing “to ‘real’ assets like commodities”. However, “if growth picks up, then demand for commodities could well surprise on the upside”.
Even if the stock market continues to surge, “investors who have missed out on big gains elsewhere will start to look to the sectors that haven’t joined in the rally so far – and again that means commodity producers”. This week’s edition of the print magazine “outlines a very promising and simple strategy for taking advantage of any commodities rebound”. David C Stevenson tips three investment trusts in order of riskiness, that, he’d “be happy to stick any one of” in his portfolio right now. To read David’s piece and get access to the entire MoneyWeek archive, just subscribe to MoneyWeek magazine.
How to protect yourself
Similarly, Bengt Saelensminde, who writes The Right Side, is worried about the stock market. He notes that, “the market is now trading at levels not seen since the days of the dotcom mania”. Admittedly, “the companies in the index now are earning an awful lot more for shareholders than they did then”. Company balance sheets are a also a “lot healthier”. This means that he’s not prepared to dump all his shares just yet and will still “run with the equity markets, for this year at the least”. However, in the long-run Bengt thinks that the bull market is “built on sand”. He therefore advises that you should take several steps to limit your downside risk.
Firstly, you should take pay attention to asset allocation. Although “most investors tend to be overly reliant on equities”, evidence suggests that “bonds and commodities can be just as profitable for a portfolio”. Cash may not deliver great returns, but it has its place due to its “unique qualities”. Gold is another obvious insurance policy, although he’s learned the hard way that, in the short run, it “just does what it wants to do”. “Bengt therefore suggests that, instead of betting on the gold price directly, you should “take advantage of what is, quite frankly, dire sentiment toward the gold producers”.
He’s promised to set out the case for gold miners in greater detail in following issues of The Right Side. You can sign up here.
The investing-platform price war
This week, our editor-in-chief, Merryn Somerset Webb, turned her attention to the latest developments in platform charges that have been prompted by the Retail Distribution Review. When Hargreaves Lansdown released its new fee schedule last week, she “didn’t like it much”. Not only was it “remarkably complicated”, it also “penalised those of us who mostly like to hold trackers, exchange-traded funds and investment trusts”. She was also disappointed that HL missed the chance to “dump pricing based on the value of your investments, and introduce some kind of flat fee system that would actually reflect the cost of servicing each client”.
However, “the majority of HL clients now at least have an idea what it costs them to be a client, and they will also mostly save a bit of money too”. Even better, rival Fidelity’s charges, “appear to be a little simpler than HL’s”. Those with under £250,000 will pay 0.35% of their assets while those with more invested will pay 0.2% on the total amount. These charges “are paid on all your assets under management at the firm regardless of whether they are held in a Sipp, Isa or a general account”, which will make “it easier to get to the volume of assets needed to get your fees down”.
Despite these changes, Merryn thinks you should wait. “Moving is an expensive business, and the price war has barely begun”. While this week’s edition of the print magazine looks at the current options in detail, she notes that, “not all the big companies – such as Barclays Stockbrokers – have announced their plans yet”. She’s also “far from convinced that those that have announced have set them in stone”. HL has told her that, “this could be a starting, not an ending point”. As a result, she’s “not leaving them yet”, choosing instead “to watch – and wait to see who moves next”.
Some users remain sceptical. “Forgive my cynicism but it would have to be thermo-nuclear Armageddon before any of these platforms offer value for money. They have made billions for themselves (in HL case literally) by liberally helping themselves to your savings”, says mr clyde. Similarly, Impromptu thinks that, “it seems that getting a computer to add zeroes to the end of each holding is a fearsomely expensive process. Ad valorem management fees are pernicious”.
Learn from Benjamin Graham
Tim Price, who writes The Price Report, thinks that you should take some lessons from one of the investment legends, Benjamin Graham. Although nearly losing his shirt in the 1929 crash, “Ben Graham went on to become one of the world’s most famous ever investors”. His book The Intelligent Investor “has a good claim to be the best book on investing ever written”. Graham’s approach focused on finding stock with a “margin of safety”. This is “the difference between the intrinsic value of a stock, and its current price as determined by the stock market”.
The good news is that “pockets of Ben Graham-style deep value, and investments that possess his “margin of safety” do still exist”. One area is “domestic-focused mid-cap businesses throughout the Asia-Pacific region”. Price recommends, Greg Fisher’s Halley Asian Prosperity Fund, which is about to be briefly reopened. Japan is another market that offers “terrific value”. Even after the recent rises, “over a half of all companies on the Topix index are not covered by a single broker”. At the same time both Japanese institutions and investors own few shares, as “Mrs Watanabe has been a lot more interested in owning bonds, or foreign stocks”.
To read more about why Tim Price likes Japan, and how you can buy into it, subscribe to his newsletter.
We’ve also covered Japan extensively in the print magazine. subscribe to MoneyWeek magazine.
How London’s property bubble could pop
One asset that you might want to avoid is London property. On Thursday I noted how it is getting out of control, with even flat prices in my area soaring up. Of course, I’m hardly alone in this view. Legal & General chief exceutive Nigel Wilson agrees with me, and has said that “the government’s Help-to-Buy scheme is “stoking demand” and should be scrapped”. While the Chancellor “won’t be keen to do anything” to risk property prices, ”Bank of England boss Mark Carney may yet surprise us all”.
While Carney may not “raise rates imminently”, he has “hardly embraced surging house prices with open arms”. As a result, the Bank of England’s review of the scheme in September “would provide the perfect opportunity to impose restrictions that would reduce its scope, but not cause the disruption that an outright end would produce”. Indeed,”if there’s ever been a good opportunity to test whether a central bank really can stop a house price bubble without crashing the rest of the economy, then this is it”.
Of course if Carney does decide to tighten up Help to Buy, then the London market “could be extremely exposed”. Data suggests that “prices in London are now 7.5 times the income of the average first time buyer” – ”the highest ratio since records began at the start of 1983” and also “56% higher than the average during that period, which was only 4.8 times” . While London “is still seen as a global safe haven”, research “suggests that people investing in this way buy mainly in areas where fellow nationals have invested”. In any case “the euro crisis will eventually be resolved”, which could lead the flows to reverse.
Of course, “prices in the rest of the UK, which still haven’t fully recovered from the crash, may have a way to run”. But “London prices are clearly in bubble territory”. Therefore, “if you really want to invest in London property, you might be better looking at the commercial property side instead”.
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